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

Author:Benklifa, Michael [Benklifa, Michael]
Language: eng
Format: epub
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.

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