Selling naked puts, either cash secured or on margin, is a means for investors to: Generate monthly or weekly income on bullish stocks Potentially get into stocks at a discounted price To enter a naked put trade you will will Sell to Open a put option against a specific stock or ETF. An option premium is received up front and the investor now has the obligation to buy shares of that security at the strike price, if the underlying is trading below the strike price at expiration. The investor will generally need to have the capital on hold in their account to fulfill the obligation of the sold put. This is a neutral to bullish strategy. You should only sell puts against stocks they would not mind owning in their trading account. It is generally not a good idea to sell puts that have a very high premium due to…
Month: May 2016
What Happens If a Vertical Call or Put Credit Spread Expires In The Money?
After one of our recent PowerOptions webinars an attendee asked: “What happens if you have a vertical call or put credit spread that expires In the money?” If both options of a credit spread (Bear Call Credit or Bull Put Credit) are in the money at expiration you will receive the full loss on the spread. You will be obligated to deliver shares of stock or buy stock at the short option strike price, and your broker would use the long option to cover the obligation. The most important thing to remember in any spread position is that
Gilead (GILD) War Story: I Learned A Trading Lesson On This One
Several months ago I purchased Gilead Sciences (GILD) in my married put Fusion account. This is an investor war story about this position and some lessons I’ve learned as a result of doing a regular quarterly review of my holdings. But before I get into the lessons learned, I need to share some background information that led up to the purchase in the first place. During the December 2015 to January 2016 time period the entire Biotechnology sector was under pressure and most stocks in the sector declined. But February 2016 brought some stability and consolidation. During the February to March period, volatility declined, Bollinger Bands narrowed, and MACD turned positive. I thought, It was clearly time to consider
Using Weekly Call Options and Weekly Put Options for a Stock Earnings Event
Each quarter we get the barrage of earnings announcements and go through all the earnings figures of each company. Earnings announcements can cause wide swings in stock prices. Positive earnings events can send a stock into a gap up in price and conversely negative or disappointing earnings can result in a stock price sell off. The question then can be asked, “Is there a way to take advantage of these swings in stock price as a result of an earnings announcement?” The advent of weekly options has made it easier to play earnings announcements. Options have a time value depending on how much time there is to expiration of the option. By using very short time frames for option speculation, this time value can be made very small. Since we know when earnings will be announced and the price reaction to the announcement happens over a very short time, weekly…
The Best Covered Call Strike Price
Writing covered calls (CC) is a commonly used strategy for increasing income in a stock portfolio. Just to review, a covered call (CC) strategy consists of buying a stock and writing (selling) a call against the stock. Your stock, acts as collateral for the obligation to deliver the stock if the stock price is above the option strike price at expiration. You receive option premium income because you give the right to an option buyer to buy your stock at the strike price. A basic rule of thumb in writing covered calls (CC) is to choose underlying stocks that you wouldn’t mind holding in case the stock declines. This basic rule would also apply if you were buying a stock for its’ dividend income. In both cases, the highest risk in the position is the decline of the stock, which could create a loss many times larger than the income…