Why The Covered Call Strategy Is Considered Safe Investing

Posted on July 20th, 2011 admin No Comments

Covered Call strategy, which is a low risk way to earn income from a stock portfolio. The income is earned by writing options. Options are a leveraged investment where you can control a large number of shares with a minimal investment. Leverage allows the investor to obtain a higher rate of return on their investment. However, leverage also has some inherent risks.

As an investor you can buy options or you can write them. There are two types of options: calls and puts. A call option gives the buyer a right to buy one hundred shares of stock at a certain price for a limited period of time. A put option gives the buyer a right to sell one hundred shares of stock at a certain price for a limited period of time.

The price that you can either buy or sell the shares is called the strike price. The cost of the option is called the premium. Call option prices go up and down in tandem with the underlying shares of stock. Put option prices go up and down in the opposite direction of the underlying shares of stock.

If the owner of the option decides to exercise their option, the option writer will have to sell their shares of stock to holder of the option. This will incur a minimal loss. It is easy to see how this is a conservative investment approach for the option writer. There are ways of offsetting the deal to protect the option writer.

With leverage the investor has the potential to earn a higher rate of return on their investment. This is because they are only putting up a fraction of the full cost of the shares. The risk of using leverage is that the investor can be wiped out faster if there is an unexpected drop in share prices.

With leverage there is the possibility to make a greater rate of return on your investment. On the other side of the coin, a small price fluctuation can render your options worthless. For the writer of the calls options, the chances are that the option will never be exercised. If the price of the underlying stock does increase, the write of the option can always purchase an option to offset the transaction. This is what makes this such a safe investment.

When an investor has a large stock portfolio they can constantly be writing options to have a continuous flow of income. Since they already own the shares this is a relatively risk free income generating technique. Not all option techniques are as safe as this one is. There are very complex transactions that are put together by professional investors and hedge funds. The ordinary investor does have to concern themselves with these to earn a nice flow of income.

Using the covered call strategy is an easy and safe way to earn some income from a stock portfolio. Not all common stocks are listed on the option markets. For this reason, if you are interested in using this technique make sure the equities you buy are listed on the options exchange. A stock broker who specialises in options may be able to assist you.

Option Basics

Posted on May 27th, 2011 admin No Comments

All stories should start at the beginning, so the option basics you should begin with are the definitions of terms that pervade all options trading.

Option Definition – An option is a right, but not an obligation, to buy or sell and underlying asset at a specific price and on or by a stated expiration date.

Call Option – A call options is the right, but not the obligation, to purchase an underlying futures contract at a specified price at a specified time.

Put Option – A put option is the right, but not the obligation, to sell an underlying futures contract at a specified price at a specified time.

Option Premium – The premium is the price you pay for the option. It represents the maximum risk you experience when you don’t exercise the option.

Strike Price – The predetermined price in the options contract at which the underlying asset is bought or sold.

At the Money –  An option is at the money when the strike price is close or equal to the current futures price.

In the Money – An option is in the money when the strike price is less than the market price of the underlying security.

Out of the Money –  The call option is out of the money when the strike price is higher than the market price of the underlying security. Puts are out of the money if the strike price is less than the market price of the underlying security.

Delta – A measure of the effect of change in the price of the underlying asset on the option’s premium. It represents the amount of the change in the price of an option for each move in the price of the underlying asset equal to one point.

Volatility – A measure of how fast and by how much prices of the underlying asset change. It is a measure of the rate of price fluctuations.

Bought Strangles: Options Pay-off

Posted on March 24th, 2010 admin No Comments

A bought strangle is made up of a bought call option and a bought put option. Combine these two trades together and if there is a different exercise price you have a strangle. A bought strangle options pay-off is demonstrated below.

Bought Call Bought Put
Bought Strangle


To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Disadvantages of Bought Strangle

Posted on March 24th, 2010 admin No Comments
  • It is possible to lose more money if the stays still or within the breakeven range than if you simply bought a call or put option.
  • If the share price rises above the strike price or falls below the strike price but remains below the upper break even or above the lower break even you will still incur a loss on the position.
  • If volatility falls for both or either option, the position could lose with or without a move in share price.


To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bought Strangle – Max Profit – Max Loss – Breakeven

Posted on March 24th, 2010 admin No Comments

Maximum Profit

Profit is attained when the share price increases or decreases substantially past the break even points. The maximum profit of a strangle is unlimited.

Maximum Loss

The maximum loss is possible if the share price is between the strike prices of the bought call and put option at expiry. This means both the call and the put would expire worthless and the maximum loss would occur. The probability of the maximum loss depends the distance between the strike price of the call option and put option. The closer the exercise prices are the less likely there will be a maximum loss as one of the options should be in-the-money and have intrinsic value. If the exercise prices are further apart time decay will be a major factor and maximum loss is possible.

The maximum loss for a bought strangle or straddle is limited to the net debit paid. The net debit paid is the premium paid for the call options and the premium paid for the put option. Therefore it is possible to lose your initial investment but no more.

Break Even

There are 2 break even points to a straddle. One breakeven point if the underlying asset goes up this is called the upper breakeven point. The other breakeven point if the underlying asset goes down which is the lower breakeven point.

Upper Breakeven Point: Strike Price + Net Debit Paid

Lower Breakeven Point: Strike Price – Net Debit Paid

To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

The Bought Strangle Strategy

Posted on March 24th, 2010 admin No Comments

The bought strangle, is a volatile option trading strategy that profits when the stock goes up or down strongly. The Strangle is a similar to the bought straddle. The strangle is in essence a technique used to place a straddle at a cheaper price. The strangle requires a lower debit amount to put on and works exactly like a straddle. One should use a strangle when one is confident of a move in the underlying asset but is uncertain as to which direction it may be. These uncertain moves can be identified through both fundamental and technical analysis.

Establishing a strangle simply involves the simultaneous purchase of an out-of-the-money call option and an out-of-the-money put option on the underlying asset. An out-of-the-money call option allows you unlimited profit to upside when the stock moves higher than the strike price with limited loss to down side. An out-of-the-money put option allows you unlimited profit to downside when the underlying stock moves lower than the strike price with limited loss to upside. Combine them both and you will have a strangle which profits when the underlying stock moves up or down beyond the strike price of the respective options. As the out-of-the-money options in a strangle is cheaper than the at-the-money options in a straddle, a strangle is sometimes described as a “cheap straddle”.

Author: Matthew Gartrell

To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Sold Strangle

Posted on March 22nd, 2010 admin No Comments

The sold strangle is the converse of the long strangle. The call and put options are sold instead of bought. The investor loses if the underlying security increases or decreases enough; but if the stock price remains stable then the options expire and the investor gets to keep the premiums.

To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Sold Straddle

Posted on March 22nd, 2010 admin No Comments

A sold straddle is a non-directional options trading strategy that involves simultaneously selling a put option and a call option of the same underlying security, strike price and expiration date. The profit is limited to the premiums of the put option and call option, but it is risky if the underlying security’s price goes up or down much. The deal breaks even if the intrinsic value of the put or the call equals the sum of the premiums of the put and call. This strategy is called “non-directional” because the short straddle profits when the underlying security changes little in price before the expiration of the straddle. The short straddle can also be classified as a credit spread because the sale of the short straddle results in a credit of the premiums of the put and call.

To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bought Straddles vs. Bought Strangles

Posted on March 20th, 2010 admin No Comments

The biggest differences between a straddle and a strangle are the cost of the positions and how far the stock needs to move to produce a profit. Because a straddle is at-the-money both the put option and the call option will be much more expensive than the call and the put in a strangle. If you play either a strangle or a straddle around earnings, you will find that among volatile stocks, the strangle will have to move quite a bit more than the straddle to make the position profitable.

To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bought Strangle

Posted on March 19th, 2010 admin No Comments

The bought strangle involves buying both a call option and a put option of the same underlying security. Like a long straddle, the options expire at the same time, but unlike a straddle, the options have different strike prices. The owner of a bought strangle makes a profit if the underlying price moves far enough away from the current price, either above or below. Thus, an investor may take a bought strangle position if he thinks the underlying security is highly volatile, but does not know which direction it is going to move. This position is a limited risk, since the most a purchaser may lose is the cost of both options. At the same time, there is unlimited profit potential.

To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au