Recommended
Fundamentals of the Option Market
staff
review of more books like this
more
books like this from Amazon.com
|
 |
Basic
Strategies for Options
Okay,
now that we have gotten our feet wet with some of option basics
– and even some of the more complicated stuff like the option
Greeks -- it is time to tackle some simple option strategies. Don't fret, we promise, if the previous five sections
didn't "bake your noodle" this section is going to be
like a walk in the park. Plus,
it should help you understand the versatility of options as an
investment vehicle.
Before
we get started we must note that for the purposes of clarity,
commissions and other transaction costs, tax considerations and
the costs involved in margin accounts have been omitted from our
examples. All of
these factors will affect a strategy's potential outcome so you
are always well advised to check with your broker and tax advisor
before entering into any of these strategies. Also, we are going to assume that all options are
American-style and therefore can be exercised at any time before
expiration.
Four
Basic Strategies
Understanding
options requires that investors get comfortable with one very
simple concept, there are two sides of every market, bullish and
bearish. We know that
calls give the buyer the right, but not the obligation to buy a
specified underlying security at a specified price for a fixed
period of time. The
call buyer believes the underlying security will rise in price, he
is bullish. We also
know that puts give the buyer the right, but not the obligation to
sell a specified underlying security at a specified price for a
fixed period of time. The
put buyer believes the underlying security will fall in price, he
is bearish. These
actions are on opposite sides of the market.
Now
let's look at the transaction from the option writer's (seller)
point of view. When
an investor sells a call option he assumes the obligation to
deliver the underlying security at a specified price for a fixed
period of time if requested by the holder of the option contract. The call writer is speculating that the underlying security
will not rise in price and he will keep the premium, he is
bearish. When
an investor sells puts he assumes the obligation to buy the
underlying security at a specified price for a fixed period of
time if requested by the holder of the option contract. The put writer is speculating that the underlying stock
will not fall in price and he will keep the premium, he is
bullish. These two
actions are on opposite sides of the market.
Bet
you guessed where we are going with all of this. The logical conclusion is that buying calls and selling puts
are each bullish strategies. By the same logic buying puts and selling calls are bearish
strategies. These are
the four basic option strategies.
You're
probably ready to get into the strategies in greater detail but
that will have to wait until the next lesson. Take a moment to think about how these strategies are
intertwined.
the
option greeks 
buying
calls
|
|
