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Say you only want to protect your stock from a decline for 1 month. This way you will receive less option premium but are more likely to make a profit. Most of the success that comes with trading comes from one source - and it's not the perfect trading system. It's important to realize that a winning system is one that consistently delivers profit over a longer time frame - and part of the equation is that a percentage of trades will be losers. Say you are interested in Apple (AAPL) and think it will appreciate in value or remain the same. In an ideal world, we would like to be able to clearly predict the direction of a stock. The premium for the Call (which is $2 Out-Of-The-Money) is $0.75, and the premium for the Put (which is $2 In-The-Money) is $3.00. This means that you will have to be prepared to roll yourcalls out to the next month come expiration. However, you need to consider other aspects of the options price like volatility. I currently hold a B.COM and am working towards the CFA designation. So, if you feel the stock has a real good shot at taking a runup, you can lean your position long by selling anout-of-the-money call. You can sell Puts on Apple (AAPL) and received the option premium in exchange for the risk that the stock may decrease in value up to the expiration of the stock options you sell. For Example, say you have $1600 and think Google (GOOG) will increase in value: say it is currently trading at $500 a share but you only have enough money to buy 3 shares. These will contain less option premium for writing the options but it is much less risky because the stock price will have to increase considerable for the option to be exercisable. For this strategy an investor will normally have a neutral to bearish market forecast. You buy calls and puts with the same strike price on Starbucks (SBUX) and same expiration month. If you had just shorted the stock you would profit as long as the stock declines in value, but you have unlimited up side risk. 1) Short Straddle: This strategy is implemented by simultaneously writing a put and a call option on the same stock with the same strike price and the same expiration date. This system can be risky, because you need a number of small profitable trades to cover one of the losses. However you also run the risk that the stock will continue to fly upwards and you miss out on that profit. If the price of the stock shoots up, your Call will be way In-The-Money, and your Put will be worthless. Fundamentally, the call writer will profit when the stock price remains at or below the strike price as the call will expire worthless while the investor keeps the premium. You need to find a system that gives you a good overall return, and stick to it. If the stock were torise quickly and eclipse the $28.50 mark, then with thebuy-write strategy, your position would have maxed out at$28.50, and you would have a $1.50 one month gain.
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