Thursday, February 2nd, 2017

Writing Options With Limited Risk – Covered Credit Spreads

Covered option offer selling dog Many of the Same Benefits as selling naked, yet unlimited Without the Risk That Makes Many Investors squeamish. This is why selling options Covered Can make an excellent “bread and butter” strategy for selling the option portfolio Serious That Is not Focused on Excitement and action, But on a strong annual return. But what is “covered” option selling? Many people think of a Covered position as an option and selling the Underlying Then owning contract – Especially In Regard to stocks. Howeve, holding the Underlying is only one way to cover an option and Not Necessarily a recommended strategy, at least when to trading futures options. Options Can Be Covered by other options. This dog and reduce margin and Risk In Some cases, totally Risk to an absolute limit amount. Yes, You Can Have limited options and sell Risk. Following is Covered The One That strategy offers strong risk management as well as Benefits SPAN margin very favorable Requirements while Maintaining high returns on funds invested. The bear call spread or bull put (Also known as a vertical spread) DECEMBER 2011 CHARTBull Put SpreadScenario COFFEE: A trader is neutral to bullish market the coffee in April 2011. Trade: The trader sells through December 2. Collects 00 coffee and put a premium of $ 1100. Then I Collected Takes part of the premium and buys a December 1. Coffee 90 put for $ 500. The net credit of $ 600 ($ 1100 – $ 500) Would Be His profit if the options expire December Coffee anywhere with Above 2. 00 per pound at the ICE Exchange inNew York. Risk: The maximum loss On this trade Would Be $ 3.150. That is, the dollar difference Between the two strikes (10 cents x $ 3. 75 = $ 3,750), minus the net credit Collected ($ 600). This maximum loss Would Be on only if December futures Coffee Were below 1. 90 at expiration. The Profits from the purchase of the 1. Would cover 90 put and Stock Losses That level below. While it does limited Provide Risk, one Would Not Necessarily Have to Hold this loss spread to STI maximum capacity (nor Would Any Reason trader want to). The spread Can Be Bought At Any time back prior to expiration. If a trader is bearish on market, He Can you use this strategy using call options Saami. Thuso a bear call spread. Benefits to the primary InvestorThe Benefits of the bull put (bear call) spread are threefold. Peace of Mind: It allows a trader to know His worst-case loss scenario. In other words, I Can Sleep at night. Staying Power: One of the key covenants of option selling is to create the Ability to ride out market swings large. The vertical credit spread allows a trader Tremendous power in the market staying. If Rapidly Declining December Coffee Began Began in price and to approach the two. 00 price level, chances are the 2. Would put 00 Increasing Rapidly begin in value. If one put a naked Were At This strike price, odds are good That one of the parameters for exiting Risk Would Be triggered naked options. ? Howeve, With The Cover position, the 1. Would Be Increasing 90 put in value as the Almost as Rapidly 2. 00 put. Therefore, it Profits from the long 1. 90 put up are making much of the loss on the 2. 00 put. For This reason, in most cases, to hold the dog puts trader in Adverse Conditions market, up Until the time the contract Underlying Approaches or Even Slightly Exceeds the short strike and still exit the position at a controlled That time with minimal loss or Even. High ROI: The Third and Possibly MOST enticing Benefit of writing bull put (or bear call) spreads is the attractive margin it gets from the Treatment Exchanges. By writing the spread, Some Believe They Are traders May “Sacrificing” premium or somehow accepting less in order to buy protection. Yet, by buying the protective put, the trader Converts from one historical position of “unlimited” risk to finite Risk. Therefor, the exchange Lowers the margin substantially for These types of positions. If a trader Would Have Entered Above the put spread illustrated at the premiums listed, the margin on the spread WAS approximately $ 850. That’s a 70% return on capital. That Does not sound like a sacrifice to me. Drawbacks and ConclusionOf course, There are drawbacks to Any strategy and the bull put spread as well have Some. The Fact That These include credit spreads Generally Must Be Held Through Before expiration or close to full profit Can be done. In Addition, spreads Can Vary Between options based on volatility, Meaning That This Kind of credit spread is not always A practical alternative. Another factor to May want to Consider trader Is That a bear call spread or bull put Often Must be sold Slightly closer to the money Than a naked option in order to collect a similar premium. Howeve, on the whole, a vertical credit spread offer an alternative tool Can an investor use to build a dog solid, risk portfolio conscious That Will enable him to take Advantage of the High Percentage of options expire worthless That still while sleeping at night. *** The information in this article compiled from Has Been Carefully Believed to be reliable sources, But it’s accuracy is not guaranteed. Use it at your own Risk. Risk of loss There is in all trading. Past performance is not indicative of future results Necessarily. The Option Traders Should Read Before trading options Disclosure Statement and Should Understand the Risks in option trading, Including The Fact That option is an Any Time sold, There is an unlimited Risk of loss, and when to an option is Purchased, the Entire premium is at Risk. In Addition, Any time an option is sold or Purchased, Including Costs transaction brokerage and exchange fees are at Risk. No representation is made That account is likely to Any Profits or Losses Achieve Those Shown similar to, or in Any amount. An account Apr Different results Depending on experience Factors Such as timing of trades and account size. Before trading, one Should Be Aware That With The Potential for Profits, There Is Also Potential for Losses, Which May be very large. All Opinions Expressed Opinions are current and are subject to change Without notice.

James Cordier is the founder of Liberty Trading Group / OptionSellers. com, specializing in Managed Stock Option Selling and Stock Option Trading Strategies. Visit website to learn the historical Benefits of Selling Options.

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!

*