Calendar Spread

Calendar spread is a neutral options trading strategy. When an investor is neutral on the market, (neither bullish nor bearish) and is looking to make additional profits from his, or her, portfolio, a calendar spread is another way to make money investing in stock. A calendar spread is an option spread where the strike prices are the same, but they have different expiration dates. These spreads are also referred to as horizontal spreads or time spreads.

A calendar spread involves selling an option with a date that is close to expiring against the purchase of another option, of the same strike price, that has a later expiration date. This stock option trading strategy is perfect for traders to add profit to a portfolio by purchasing long-term options that have a reduced cost. Calendar Spreads benefit from time decay because the option sold loses value more quickly than the new one purchased. If the investor’s prediction of a neutral market is correct, the value of the calendar spread increases. A calendar spread is profitable because it capitalizes on the time value differentials when there is a neutral market.

When the option that is near term expires then several actions are possible. If the investor’s technical analysis still appears to be correct, then the trader can hold the long position (if sufficient time remains on it) and sell another short term option against the long position. If there is concern that the market is ready to fall then the investor can close out the long position and take the profits. If the trader is dealing in calls and the indications are for a more bullish market, the investor can simply continue to hold the long position and realize larger profits in the future. In any case, the cost incurred through buying the long position was reduced, or eliminated, by the premiums collected from the option that was sold.

If implemented successfully, the risks involved in a calendar spread are minimal. The potential losses are limited to the net premium paid. This is the money spent for the option that was purchased minus the money received for the near term option sold. When implementing a calendar spread, it is best to attempt to purchase long term options that are undervalued.

One successful trading strategy in a calendar spread is to buy LEAPS (Long Term Equity Anticipation Securities) because they can be purchased much cheaper than actual stock. The risk in this is that if the underlying stock goes down in price, the LEAPS lose value as well. Therefore, a trader hopes that the near term option sold expires without value, and then the investor sells more options farther out and continues to collect premiums. This way, the trader is able to reduce the cost of the LEAPS or actually realize a profit in a successful trade.

As with any stock market strategy, it is important for an investor to review the trading plan and understand the potential risks and rewards from this strategy.

There are many options trading strategies in addition to selling covered calls that you should learn including the buy strangle,  the buy straddle and the put hedge, just to name few.

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Sell Strangle

A savvy, experienced investor has a money making plan for any condition in the stock market. Whether the market is stable or volatile, whether it is bullish or bearish, there is a method for finding a profit. Such is the case with a sell strangle which is a neutral options trading strategy. This technique requires the investor to sell a call option that is out-of-the-money as well as a put option that is also out-of-the-money. Both the call option and the put option need to be on the same stock with the same expiration date. This strategy is very similar to a sell straddle but with a sell strangle, the strike prices are not the same.

A sell strangle is made when the market has experienced a substantial upward move and your expectation is for consolidation. In this case, the possible results are a known, limited gain or unlimited risk. A sell strangle isn’t a move for the beginner investing in the stock market since the risk to reward ratio is not positive and extreme care with this maneuver is required.

The gain in a sell strangle is only the premium that is received for selling the call option and the put option. Remember, as with any stock transaction, your profit is reduced by any commissions. Done as a response to a dramatic upward move that has occurred, the investor is expecting the market to experience a consolidation and absorb its gains before moving again. Since the market is filled with extreme stock volatility, the cost of the Call and Put Options will tend to be very high. When the market does consolidate, volatility will decrease and lower the price of the options, allowing the investor to buy back the options at a lower price to close the position. With a Sell Strangle, the concept of time decay also works to the advantage of the investor. While this is a somewhat complex transaction, a sell strangle is an excellent stock option trading strategy for an experienced trader.

A sell strangle requires that the investor monitor the position for unfavorable movement and, if necessary, buy back one of the options if there is any indication that the market will resume its trend or reverse direction. If there is an indication that the market will resume its upward trend, the trader should buy back the call. If the market appears to be headed down then the trader should buy back the put.
It is important that the trader do stock market technical analysis prior to implementing this strategy. The powerful charting capabilities of this stock investing system will offer insight into movements in the market before attempting to enter a sell strangle. By using a trading system like Japanese Candlesticks, a trader can not only identify the mood of the market, but he or she can identify a stock that is a candidate for a trade like a sell strangle.

While a Sell Strangle is not advisable for everyone, it is one of several investment options that can create profits for a skilled trader. Using a tested stock trading plan, good technical analysis tools, and a system such as Japanese Candlesticks, a trader will find this method to be something that not only creates a profit, but adds another weapon to the arsenal.

There are many options trading strategies in addition to selling covered calls that you should learn including the bear call spread,  the bear put spread and the put hedge, just to name few.

 

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Sell Straddle

Sell straddle is a neutral options trading strategy. When the market has just made a dramatic move and it is expected to consolidate, a possible trading strategy to implement is to sell a straddle. This technique involves selling a call option and a put option on the same asset with the same price and expiration date. The result is a known, albeit limited gain, and the danger is unlimited risk. Selling a straddle requires extreme caution and constant monitoring of the position, and the investor must be confident of his, or her, assumptions on the direction of the stock. A sell straddle is definitely not recommended for all investors; the risk reward ratio is not favorable to anyone but the most vigilant trader.

In a sell straddle, the risk is truly unlimited. The gain is composed of the premium that is received for selling the call option and the put option, minus any commissions. In most cases when selling a straddle, the put and call that are sold on options, are overpriced and at-the-money or close to it. This is done in response to a dramatic move that has occurred, when the expectation is that the market will consolidate and absorb its gains before moving again. Since the market is extremely volatile, the cost of the options is very high. When the market does consolidate, stock volatility will decrease and lower the price of the options, increasing the profits when the investor buys back the options at a lower price to close the position. With a sell straddle, decay also works in favor of the investor. While this is a somewhat complex transaction, a sell straddle is an excellent stock market strategy for an experienced trader.

A sell straddle requires that the investor monitor the position for unfavorable movement and, if necessary, buy back one of the options if there is any indication that the market will resume its trend or reverse direction. If there is an indication that the market will trend up, the trader should buy back the call; if the market appears to be trending down, the trader should buy back the put.

As with any transaction, it is important that the trader do technical analysis. Technical analysis with Candlesticks is a trading system that will help the investor to understand the movements in the market before attempting to enter a sell straddle. By using a stock trading system like Japanese Candlesticks, a trader can not only identify the mood of the market, but identify a stock poised for an implementation of a strategy like a sell straddle. The charting ability of Candlesticks is perfect for options research and the investor can more confident using this system.

While a sell straddle is not recommended for all traders, it is one of the investment options that can create profits for a savvy investor. Using a tested stock trading plan, good fundamental and technical analysis skills, and a system such as Japanese Candlesticks, a trader will find this strategy to not only be a benefit to the bottom line, but also a skill to know, and implement, in the future.

There are many options trading strategies in addition to selling covered calls that you should learn including buying putsselling calls, and the buy strangle, just to name few.

In addition to free tutorials, videos, and live trading room hosted by Stephen Bigalow weekly, you  can access Steve’s daily market comments that provide insight into the markets. View member benefits for more information.

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Selling Covered Calls

Selling covered calls is a neutral options trading strategy. One of the best techniques to learn when trading stocks is selling covered calls. Selling covered calls means that there are investors willing to pay for the right to take a stock if it reaches a much higher price. Selling a call requires that you have at least 100 shares of a stock. It is an excellent stock market strategy to implement while waiting for a stock to reach your identified sell point. This technique can be used repeatedly, and it can be a great way to create income.

For example, say that you purchased 500 shares of ABC Corp in 2000 for $25.50 per share. Since the current price is $26.00, you have basically broken even in six years. While you didn’t know what would happen during that time, you still could have been making money on your investment by selling covered call options against your shares. This would have allowed you make money even though your investment was sitting around doing basically nothing. You have 500 shares, so you can sell five options, since options must be sold in groups of 100. In this example, you are going to sell out-of-the-money (OTM) covered call options. This means that the stock has a strike price (the target price for the buyer) which is higher than the current price. The covered call that you are selling has a strike price of $30.00 per share and a premium of $ 0.25. Since you have 500 shares, the five covered call options that you sell will bring in a total of $125.00. This technique works well and only a substantial move higher forces you to sell.

By selling covered calls, you are able to accumulate income passively over time by collecting the premiums on your options. If your option doesn’t reach and maintain the strike price during the time period, the premium and the stock are yours. If you get assigned on your options and are forced to sell your covered calls, it is even better. When the $30.00 strike price is met, not only did you receive $125 from the premiums, but you also have a gain on the stock from your original purchase price of $25.50. That turns into a $2,250 profit.

Selling covered calls is an excellent stock option trading strategy, but it is no substitute for technical analysis and learning how to read stock charts. If you purchase a stock on a strong upward trend and someone forces you to sell your covered calls, you no longer have the stock and you are missing out on its upward climb. If you want to continue holding stock in this company, you must buy again and you will be forced to pay a higher price for it.
Selling covered calls is a great way to make money on your favorite holdings while you wait for them to trend upward.

There are many options trading strategies in addition to selling covered calls that you should learn including buying puts, selling calls, and the buy strangle, just to name few.

In addition to free tutorials, videos, and live trading room hosted by Stephen Bigalow weekly, you  can access Steve’s daily market comments that provide insight into the markets. View member benefits for more information.

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