Many investors have never even heard of stock options selling. For most people options trading is synonymous with risk and potential big profits or losses, using leverage by buying options. However, a lot of savvy investors use strategies involving selling options, also known as options writing, to hedge existing positions against the possibility that the stocks that they already own, or are short, will move against them.
Now hedging with options is nowhere near as exciting as leveraging with options and doubling or tripling your money quickly. Perhaps this is the reason you don’t get the details of options selling explained as frequently in books or on websites on stock options basics. It certainly is a lot more Continue reading Selling Options Guide
This is the second article of our options trading explained series, in which I will attempt to help you learn options trading strategies as opposed to restricting myself to a generic explanation of stock options. In the earlier post I explained stock options trading in terms of simply going long, or buying, puts and calls as the simplest but most risky of stock options strategies. In this article I’d like to talk about selling or writing options as it opens up a range of possibilities for an investor to improve the overall performance of his portfolio.
When you move beyond thinking of options only as leveraged, risky investment vehicles you begin to understand them as savvy investors and professional traders do, ripe with opportunities for conservative option strategies. There are many ways to use them besides either making multiples of the premium you pay or losing most or all of that premium. I’ll cover options trading examples like writing puts and calls, which affords you hedging options (as it were) that can help you protect existing gains in open stock positions; you could sell options to create an ongoing income from your portfolio without having to sell stock at all; you can even offset losses in stock positions you are not yet prepared to close out, by writing contracts against those long or short positions. All these trading strategies involve simple options selling, and these are just a small fraction of the ways that you can use these incredibly versatile investment tools, once you get stock options explained to you.
Writing Options As A Simple Hedge
Let’s say that you have a nice profit in a stock that you would prefer not to sell yet. Maybe it’s had a run-up recently, and while you are still bullish on the company, your practical side tells you that the stock might very well be due for a pullback.
In addition to the optimism reflected in the stock price, it seems like the options associated with the stock have relatively pricey premiums, with even the out-of-the-money options costing more to buy than they normally might.
For an investor contemplating buying options, this is a risky situation. If you bought, or went long calls here, not only would the upward stock move have to continue, the volatility in the stock has to stay relatively high, or you will see time value decay eat away at the value of your long calls. Let me be clear: Continue reading Options Trading Explained-Writing Options