Have you ever suggested to your stockbroker that you were interested in trading options? More than likely he (your broker) tried to talk you out of investing in options. Quite possibly, he insisted that options were high risk and only professional traders should use options in their investments.
Well, let me let you in on a little secret. The reason why your broker doesn’t want you to trade options is because your broker does not know how to trade option properly. Understand, most stockbrokers are sales people, not investors. They offer what is hot in the market and usually push you towards managed money. The reason being is because your stockbroker gets paid to direct your capital into funds where portfolio managers manage stocks and bonds in anticipation of beating the market indices nifty option tips.
A true investor and some very well trained stockbrokers (hard to find these brokers, but there are some out there somewhere) will tell you that option trading is a very lucrative investment and less risky than what your broker is suggesting. Option trading strategies can increase your return on your overall portfolio by leveraging and insuring the stocks in your portfolio.
Option trading strategies, range from creating income into your portfolio on a monthly basis, insuring any downside in a particular stock you may be holding in your portfolio and a way to leverage both the upside of the market and the downside, all at the same time.
Now, if you are like me and want to see your portfolio increase in value overtime, while having the opportunity for income, (which everyone reading this is probably saying no $#!t) then you need to learn all the option trading strategies that are available to you.
To give you an example of a great option trading strategy that you can implement right now is the selling of covered calls. This simple option trading strategy will allow you to take an underperforming stock in your portfolio and create a monthly income. How this option trading strategy works is as follows:
Step 1. You own a stock in your portfolio that is either stagnant in your portfolio (meaning not moving up or down), or the stock has dropped way below your purchase price.
Step 2. You sell a call option on this stock. Basically, for every 100 shares of the stock you own, you can sell 1 call option related to that stock. (Example is you own 500 shares of ABC stock, you can sell 5 ABC call option contract). This scenario is selling a covered call.
Step 3. You collect a premium from the sell of the call option. (These premiums vary depending on the volatility of the stock and the amount of time left on the option contract.
Step 4. Now you sit back and see what the market will do for you. For example, the stock may move down in value and the call option will expire worthless, meaning you keep the premium and sell new call options next month, or the stock stays stagnant and does not move during the month. Again you would keep the premium and write another call option against your stock. The last scenario is the stock starts to increase in value and you have to sell the stock for the strike price of the call option. Typically, if the stock you have has a high volatility, you probably would not use this option trading strategy. But, it is your decision.
Now, here are a few items I left out of the above scenario. You can sell your call options in the money, out of the money or at the money. We will discuss the terminology of these positions in a later article. But for now, I hope you see the value of option trading strategies in your stock portfolio.
Please come back soon to learn more about different option trading strategies to increase your overall return in your portfolio. You can also subscribe to this page and get future updates sent directly to your email box. Just click the RSS feed at the right.