Author Login | Popular Articles | RSS Feeds | Sitemap

Home | Finance


Options Trading Strategies: The "Up" Scenario

By: Brett Fogle

The “up” scenario

In the “up” scenario, the maximum gain that can be attained is the stock finishing at $10.00 or higher.

At $10.00, you would profit from the full value of the extrinsic value of the option which is $.50 and you would also have $.50 of capital appreciation from the stock for a total of $1.00. This represents a 10.52% one-month return or an annualized return of 126.32%.

It is not realistic to expect this type of return every month but remember, recent studies show that premium selling works approximately 80% of the time, which is still very good.

We stated earlier that the maximum return of this buy-write will be actualized when the stock reaches $10.00 or above and the maximum return will be $1.00, and no more than $1.00. As the stock goes higher, the option will earn less in direct proportion with the increase in capital appreciation.

For example, if the stock closes at $10.30 you would receive only $.20 from the option. The option would now be worth $.30 because with the stock at $10.30, the 10 strike call would have $.30 of intrinsic value.

Since you sold the option at $.50, you would see a $.20 profit ($.50 - $.30 = $.20). Since you bought the stock at $9.50 and it is now $10.30 you have $.80 of capital appreciation. Combine the two and you have a $1.00 profit.

Let’s look at what happens when the stock trades up to $12.00 and see if you again have a $1.00 return on the position. At $12.00, the option will have $2.00 of intrinsic value (stock price – strike price) because it is in the money.

You sold the option at $.50 so you have a $1.50 loss. However, you bought the stock for $9.50 therefore you have a $2.50 capital gain. Combined, you have a $1.00 profit.

In a third example, if the stock trades up as little at $.10 you still have a $.60 gain. You will receive $.50 from the sale of the call which would expire out of the money thus worthless plus $.10 of capital appreciation. $.60 represents a 6.3% one month return.

Please refer to the chart below for examples of total dollar profits per number of contracts, remembering that each contract controls 100 shares of stock.

Observe that if the stock closes over $10.00, then your stock will be called away because your short calls will be exercised. This is correct but we will talk about position management later. For now, let’s get back to our three scenarios.

In the “up” scenario, you would profit with the buy-write when the stock is up as little as a penny, but you are also limited on our maximum profit.

You are limited on your maximum profit as defined by the formula below:

Maximum Profit = Strike Price + Option Price – Stock Price.

This method of calculation will work every time. As you see, the buy-write has a positive but limited upside potential.

Article Source: http://www.articlesnatch.com

About the Author:
Brett Fogle is the president of Options University. Brett and his veteran traders teach safe and effective options trading strategies. Free strategies can be found at http://www.optionsuniversity.com/blog

Tags: , , , , , , , , ,
| Print | Ezine Ready | |

Recent Finance Articles

  • Why MTN Trading Programs Are Vital In A Global Recession By: Marcel Ford - Is it the dilapidation of the economies of whole, or the monotonous results so many are experiencing in the global stock markets; whatever the real reasons, most high net worth Investors, as well as hedge funds and corporations, are becoming more aware of the close-lipped industry of Private Trade involving Medium Term Notes, known as MTNs or Mid-Term Notes.
  • Medium Term Note Trading And Their Importance In A Worldwide Recession By: Marcel Ford - Private Trading of Medium Term Notes, also known as Mid-Term Notes and MTNs, is essentially capital raised for the purposes of the development of working capital and the upward trend towards strengthening a company's balance sheet. More times than naught, private trade programs encompass the development of new products, technologies and overall expansion.
  • Reasons for Consolidating Your School Loans By: John Nolan - If you have more than one school loan you are probably tired of all the administration involved in maintaining and repaying them. If so, you might benefit from consolidating your school loans making them much easier to pay and to organize. Here are the reasons why you should think about consolidation. 1. One Payment - You will not have to pay multiple lenders, instead you will have just one monthly payment for all of your current loans. 2.
  • Online secured loans - for a home or car By: Gordon Parkes - If you want a fast secured loan to fund a home or car purchase, then you should consider applying online. Completing a loan application over the Internet will cut down on the time taken up by filling in forms and will speed up the application process. This can be especially important if you have found your dream house or car on the market. With a fast secured loan, you will be able to snap it up before anyone else.
  • Top five reasons plastic beats paper, Rock, Scissors By: searchrankpros - Debit cards are convenient Your wallet doesn’t have to be fat to carry your money around. There’s a more convenient way to tote your money along with you - carry your prepaid debit card and you’re good to go practically anywhere you need. Feel the freedom that carrying a Visa or MasterCard brings and make purchases virtually anywhere. And for the times that you absolutely need cash, get it from ATMs worldwide. Safer than carrying cash Misplace your wad of cash and you can pretty much kiss it goodbye.
  • Real Estate Agent Turned Web Developer By: Luat Tran Van - Although the housing crisis continues to be a problem in the United States, this can be a perfect time for Realtors to learn more about Real Estate Web Marketing. The ever growing numbers of social network sites along with social bookmarking sites make this possible to reach out to an array of families and individuals. While sites like Trulia and Zillow are racking up members, Real Estate Agents still have a thing or two to learn about the web.
  • Debt Reduction Management: appropriate way to manage debts By: Alla T - There will be no normalcy in life, if you are practically bogged down with a huge amount of debts. If that’s the case, then you should look for ways to down size the amount of debts, other wise your own financial freedom is at stake. Moreover, with a diminishing monthly income, it is not possible to pay away the debt. This is a classical situation and to get out of the crisis, it would be appropriate for you to opt for debt reduction management plan.
  • Bad credit personal loans: funds for your personal needs By: Tess Ocean - Borrowers facing credit problems such as CCJs, IVA, arrears, defaults, late payments and bankruptcy all can apply for bad credit personal loans and obtain the required funds easily. Now you will not face any rejections despite of your bad credit status. Bad credit personal loans are available in two forms: - secured and unsecured. Secured bad credit personal loans require you to pledge your valuable asset as collateral. You can offer your home, car, bonds and other valuable documents as security.
  • Tips When Choosing Your Credit Cards By: MIKE SELVON - If you are like most people who have reached the age of adulthood and have a job or a bank account and even minimal spending, then you have more than likely received numerous credit card offers both in your mail box and in your email inbox. When people start receiving these multiple offers for credit cards, things can get confusing and often people are left a bit bewildered about which offer is really the best for them and for their financial health.
  • How to Develop a Budget on a Debt Management Plan By: Abby Reid - It isn’t easy to carry out a debt management plan or live on a reasonable budget in today’s consumer market. Effective advertising and marketing executives work hard to convince the average American citizen that happiness lies in material possessions that only money can buy – fast luxury cars, large homes or cutting-edge electronics. Unfortunately, this is why many people are bogged down with debt and bankruptcy.

Comments

Search Ebay

Still can't find what you are looking for? Search for it!


Add to Google
ArticleSnatch Authors:
Member Login Sign Up Submit Articles FAQ Submission Guidelines Top Authors
For Publishers:
Most Popular Articles Ezine Notifications Article RSS Feeds Terms of Service
For Everyone:
Blog About Us Link to Us Contact Us New Stuff Link Directory Privacy Policy Sitemap Resources
Our Sites:
Free Magazines Book Your Hotel Stay Free MySpace Tools Massive Video Collection Broadband Speed Test
Click here to submit your free, permanent ads to TheFreeAdForum.com!

Submit Your link to the Open Link Directory Project

Copyright 2005-2008 MJE Sales, LLC. All Rights Reserved.
Proud member of the ArticleCkr Search Network Search Network!
ArticleSnatch.com is free for both publishers and authors to use and is supported entirely from advertising revenue.
Use of our service is protected by our Privacy Policy and Terms of Service.