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Additional resources for All About Options
Trading several markets takes more of your time, as does updating a system that is tracking a number of alternative commodities or stocks. On the one hand, you need to be diversified. Equally important is to avoid becoming overextended financially, psychologically, or personally. OVERVIEW OF STRATEGIES I begin with a general discussion of option trading strategies and then move to an explanation of specific ones. There will be no attempt to provide a definitive discussion of every possible strategy.
Learning the Basic Option Trading Strategies (and Uses) to Solidify Objectives 37 A put works the same way, but in the opposite direction. ” You think, for example, that the shares of ABC Company, now at $50, are headed south in a big way, maybe even as much as 50 percent. Checking the paper, or calling your broker, provides the following prices: Put-Strike $40 $45 $50 $55 $60 Prices 3 ⁄4 1 11⁄8 7 10 Price/Share Out-of-the-money by $10 Out-of-the-money by $5 At-the-money (current share price) In-the-money by $5 In-the-money by $10 Again, the market isn’t bracing for a major slide in the price of ABC’s stock.
A $4 call carries a $50 premium (5,000 oz. 01). The at-the-money strike price is very reasonable if your analysis proves to be anywhere near accurate. At 5 cents per ounce, the call costs $250 plus transaction costs of, say, $50, for a total of $300. A $2per-ounce gain in silver would amount to $10,000. The ratio of profit to loss would be 33:1. Another way of looking at this trade would be to calculate the breakeven point. How much does silver have to gain just to get your $300 back? Each penny gained adds $50 to the intrinsic value of the at-the-money option.