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Without getting into the trading of spreads, which is
aunique strategy in itself and a topic for future
OptionsUniversity courses, we will talk a little about the
roll. This provides you with the option premium while your
maximum risk is infinite (the stock can potential increase
to infinity, ha). For example, we would initiate a Straddle
for company ABC by buying a June $20 Call as well as a June
$20 Put. It's important to realize that a winning system is
one that consistently delivers profit over a longer time
frame - and part of the equation is that a percentage of
trades will be losers. Fundamentally, the call writer will
profit when the stock price remains at or below the strike
price as the call will expire worthless while the investor
keeps the premium. How to choose the Strike Price?The strike
prices used will depend on how bearish an investor is. This
is safer than buying either just a Call or just a Put. Your
lean willdictate to you which new option to sell. In cases
like this, a Straddle strategy would be good to adopt. B)
The shares fall - the option expires worthless, you keep the
premium, and the option outperform the stock again. The Bear
Call Spread is implemented by buying a put option while
simultaneously writing a put option with a lower strike
price. Other times, you may have to buy your short call back
so thatyou will not lose your stock. An investor feels a
stock will decrease only slightly and is willing to forgo
any depreciation in the stock below the strike price of the
written put in exchange for the premium received for writing
the lower strike price put. So in the case where the stock
price doesn't move, the premiums of both the Call and Put
will slowly decay, and we could end up losing a large
percentage of our investment. This type of approach takes a
lot of confidence and self-discipline, as it's very easy to
give up if those six little losses all happen in a row,
without a winner in sight. The put is purchased in order to
protect the lower bound, and the call is purchased and can
be sold at strike price for the upper bound. Long (buy),
where you do long call in bullish condition and long put in
bearish condition. Remember when you sell an option you seek
to capture extrinsicvalue. In cases like this, a Straddle
strategy would be good to adopt. Then the trader switches to
another system, messes around with that for a while, sees a
loss, and switches again. In those rarecases, you will not
want to roll the position, because itmight be called away if
the call you sold is exercised when itbecomes in the money.
When the decision is announce the stock will most likely
move dramatically in one direction. How to choose the Strike
Price?The strike prices used will depend on how bearish an
investor is. You need to find a system that gives you a good
overall return, and stick to it.
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