Long calls are not the same as short
puts. Buyers of option contracts are long, while sellers or writers of option
contracts are short. Call and put options give you the right to buy or sell the
underlying securities at specified prices, known as strike prices, before
predetermined expiration dates. Long and short option strategies have different
risk-return profiles, with downside risk usually limited for long positions.
The relationship between strike prices
and market prices determines profits and losses. A long call is profitable when
its strike price is below the market price of the underlying stock, while a
long put is profitable when its strike price is above the market price. The reverse
is usually true for short calls and puts. You pay a premium, which is the
market price, when you open or buy an option contract, and you receive the
premium when you sell or close an option contract.
Adjusting an option
position really is an essential skill for any investor – I would even say it is
a mandatory requirement. Properlymanaging
riskby adjusting can help you repair strategies that have gone
wrong, limit huge losses or even create additional potential gains As a disclaimer it’s important that you
know both HOW to adjust an option trade and that you are aware of the
additional broker commissions you will be charged to exit/enter
additional contracts. Take your time when adjusting so that you don’t adjust
and create an even bigger hole from which to dig out of.
1. What’s the goal?
Make sure that you are either reducing risk
somehow someway or creating a new
strategy that could make you more money.
2. Are you really reducing risk?
for a minute that you are not going to make money if you get into a bad trade.
3. Should you just close out the trade?
is always one of my 1st considerations. If you’ve made a small profit and
things are starting to go south it might be a wise decision to just close out
the trade and re-evaluate the market. Don’t let your ego get in the way of
4. How have the market trend changed?
sure when you entered the trade you had a firm opinion on the market if the
trend is changing then is your options strategy structured to profit from the
new market Wait to see a medium term change to adjust and remember that 1 day
doesn’t make a trend.
One of the
riskiest investment strategies in the financial world involves selling stock
short. This involves borrowing stock from your broker and selling it. If the
stock's market price drops, you can buy it back at the lower price, pay back
your broker and pocket the difference. Problems arise if the stock price
doesn't co-operate and instead skyrockets. You can hedge your position by
buying protective call options.
A call option gives
the option holder the right, but not the obligation, to purchase the underlying
security at a fixed price, called the strike price, for a set period. If the
option isn't exercised before it reaches its expiration date, it becomes
worthless and ceases to exist. Call options are traded on major investment
exchanges in much the same way that stocks are traded. While owning a call
option doesn't give you ownership of the underlying stock, it does give you
control over that stock for as long as the option is in force.
derivatives trading, traders can hold long or short
positions for more than 1 day whereas in equity trading, short sell trading are supposed to square off before the market closing on the same day. Traders
must not carry forward their short positions in any way, denying which results
in penalty around 20% in auction market Apart, thesetips are divided into
indexes and stocks. As said in our previous article, virtual scrips likenifty, bank nifty, cnx IT
ect., are called as index stocks where as companies which exist in real are
said to be stock scripts.
A combination is an option trading strategy that involves
the purchase and/or sale of both call and put options on the same underlying
Call & Put Buying
The straddle is
an unlimited profit, limited risk option trading strategy that is employed when
the options trader believes that the price of the underlying asset will make a
strong move in either direction in the near future. It can be constructed by
buying an equal number of money call and put options with the same
Like the straddle, the strangle is also a strategy that has limited risk and
unlimited profit potential. The difference between the two strategies is
that out-of-the-money options
are purchased to construct the strangle, lowering the cost to establish the
position but at the same time, a much larger move in the price of the
underlying is required for the strategy to be profitable.
In contrast to buying options, selling stock options does come with an
obligation - the obligation to sell the underlying equity to a buyer if that
buyer decides to exercise the option and you are "assigned" the
exercise obligation. "Selling" options is often referred to as
When you sell (or "write") a Call - you are selling a buyer the
right to purchase stock from you at a specified strike price for a specified
period of time, regardless of how high the market price of the stock may climb.
One of the most popular call writing strategies is known as
a covered call. In a covered call, you are selling the right to buy an equity
that you own. If a buyer decides to exercise his or her option to buy the
underlying equity, you are obligated to sell to them at the strike price -
whether the strike price is higher or lower than your original cost of the
equity. Sometimes an investor may buy an equity and simultaneously sell (or
write) a call on the equity. This is referred to as a "buy-write."