It is worth noting that U. For example, if the market rises sharply, then the investor can buy back the call sold probably at a loss , thus allowing his stock to participate fully in any upward move. The investor is also free to then be able to write a call option at a higher strike price if he wanted to. The OIC website offers a free covered call calculator here. In the case of the covered call, a call is written against stock already held. In the case of the cash secured put, an investor writes a put option and holds cash with which to buy the underlying stock if the put is exercised.
So the two possible outcomes are either buying the stock more cheaply at the strike price less the premium received or just receiving the premium the option is not exercised, so the investor keeps the premium.
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For detailed information on this strategy go here. Figure 2 shows the profit and loss on the combined stock and option position at expiration. It is the same as that of the covered call. Again, the risk is in the stock. If the stock rises and the put is not exercised, then the investor keeps the premium. The investor will have been disappointed, however, if she had been hoping that the put would be exercised on a down move in the underlying stock thus enabling her to buy the stock at the effective lower price of the strike price less the premium received , and then hoping to participate in a rally in the stock price.
If the stock falls, then the put she has sold is likely to be exercised and the investor buys the stock at the exercise price, further enhanced by the premium that she has received.
Constructing income-generating strategies for options
If the price keeps falling, however, she will take a loss once the cushion of the premium income received has been exceeded. A covered combination strategy is where one call and one put with the same expiration, but different strike prices, are written against each shares of the underlying stock. Two options are sold, so two amounts of premium are collected.
This is a combination of the covered call, plus a cash secured short put.
It is also known as a covered strangle as both a put and a call are sold with different strikes, and the underlying stock to be sold if the call is exercised is already held. The investor also needs to be able to pay for the extra stock that he will purchase if the put is exercised.
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OPTION-BASED STRATEGIES: OPT IN OR OPT OUT? | FactorResearch
Concentration in a particular industry or sector will subject QYLD to loss due to adverse occurrences that may affect that industry or sector. QYLD engages in options trading. An option is a contract sold by one party to another that gives the buyer the right, but not the obligation, to buy call or sell put a stock at an agreed upon price within a certain period or on a specific date. A covered call option involves holding a long position in a particular asset, in this case U. By selling covered call options, the fund limits its opportunity to profit from an increase in the price of the underlying index above the exercise price, but continues to bear the risk of a decline in the index.
How can covered calls be used? Covered call writing is not for everyone. But for certain investors it can make sense. Generally speaking, there are three main benefits to writing covered calls:. What are the risks? If you decide to write covered calls, you must be willing to:. Using covered calls wisely. Help us tell more of the stories that matter from voices that too often remain unheard. Join HuffPost Plus. This post was published on the now-closed HuffPost Contributor platform.
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