Think Like an Option Trader: How to Profit by Moving from Stocks to Options by Michael Benklifa

Author:Michael Benklifa [Benklifa, Michael]
Language: eng
Format: mobi, pdf
Publisher: Pearson Education
Published: 2013-05-21T22:00:00+00:00

Build 2: Reducing Your Risk

You can choose to sell a call and take the risk on the other side of the trade. In that trade, the most you can make is the sale price of the option. A buyer wants to hit home runs, and a seller wants to hit singles.

As a stock trader, when you buy stock, you are pretty much done with the strategy behind that asset when you execute the transaction. When you’re trading options, the purchase of a call could be just one part of a more sophisticated trade. For example, a synthetic stock position is created by buying an at-the-money call and selling an at-the-money put. This process is further expanded by adding to a call to create ever more sophisticated trades. The first approach is to build a spread, as discussed in the following sections.

Variation 1: Buying a Spread

In Figure 3.7, the risk the seller is willing to take for the at-the-money option is $15. The seller assumes that the option will not expire with the stock price higher than this strike. This doesn’t mean it can’t go higher in the interim, just that it won’t be higher by expiration. There is a way to use this price information to your advantage: through the spread.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.