Options trading long puts and calls strategy
Long Calls and Puts Profits are achieved if the stock is trading above the Break Even point. Profits are achieved if the stock is trading below the Break Even point.
Profits are theoretically infinite. You can benefit from stock movement without owning shares of stock. Owning calls can protect short stock positions. Owning puts can protect long stock positions. Call buying and Put buying Long Calls and Puts are considered to be speculative strategies by most investors. In a long strategy, an investor will pay a premium to purchase a contract giving them the right to buy stock at a set strike price Call or to 'Put' the stock to someone put.
The investor needs the underlying security to move in the desired direction in order to gain a profit. Advantages with Long Options Potential Profits can be infinite. Long Option positions are highly leveraged. The maximum risk of long calls and puts is the cost of the option. Disadvantages with Long Options: Long Options positions offer no downside protection, as one might have with a Covered Call trade, even though the maximum risk is low. Long Options are a depreciating asset.
The value will always decrease as the expiration date is approached. Timing when entering a Long Option trade is critical as time is always working against the investor in this strategy. Call Buying Long Calls: This is a bullish to extremely bullish strategy. As the underlying security increases, the value of the Call will increase as well. Purchasing a Call gives the investor the right to buy shares of stock at a set price strike price.
A Call option investor is looking to take advantage of the stock movement without investing a large amount of capital to own the stock. Summary of the Long Call Strategy Buy a Call only when you are extremely bullish on the stock, index, or market in general. Select a candidate whose underlying stock is in an up-trend or has a recent BUY signal. But when you use puts as an alternative to short stock, your risk is limited to the cost of the option contracts.
But be careful, especially with short-term out-of-the-money puts. If you buy too many option contracts, you are actually increasing your risk. Options may expire worthless and you can lose your entire investment. Puts can also be used to help protect the value of stocks you already own. These are called protective puts. A general rule of thumb is this: You can learn more about delta in Meet the Greeks. Try looking for a delta of -. In-the-money options are more expensive because they have intrinsic value, but you get what you pay for.
If the stock goes to zero you make the entire strike price minus the cost of the put contract. For this strategy, time decay is the enemy. It will negatively affect the value of the option you bought. After the strategy is established, you want implied volatility to increase. Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options.
Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risks , and may result in complex tax treatments.
Please consult a tax professional prior to implementing these strategies.