Options Strategy Guide

Buy-Write or Covered CallConstruction – Long stock, short one call for every 100 shares of stock owned.Function – To enhance profitability of stock ownership and to provide limited downside protection against adverse stock movement.Bias – Neutral to slightly bullish.When to Use – When you feel the stock will trade up slightly or in a tight range for a period of time and you plan on holding the stock for longer term.Profit Scenario – If stock rises, profit will be enhanced by premium received. If stock stagnates, you will profit from premium received from call sale.Loss Scenario – If stock trades lower than the point defined by your purchase price minus the premium received from call sale you will lose dollar for dollar. Call premium received will act as an offset to the loss in the stock.Key Concepts – If stock trades up aggressively, you will only profit up to a stock price defined by the strike price plus option price. If the stock continues higher above that point (breakeven), you will incur lost opportunity. Further, if stock closes above strike price, stock will be called away unless necessary adjustment is made. Philosophically identical to the Sell- Write position except in opposite direction. Time decay helps the position.Sell -Write or Covered PutConstruction – Short stock, short one put for every 100 shares of stock shorted. Function – To enhance profitability of short stock position and to provide limited protection against adverse stock movement.Bias – Neutral to slightly bearish.When to Use – When you feel the stock will trade slightly down or in a tight range for a period of time.Profit Scenario – If stock falls, profit will be enhanced by premium received. If stock stagnates, you will profit from premium received from put sale.Loss Scenario – If stock trades higher than the point defined by your stock sales price plus the premium received from put sale, you will lose dollar for dollar. Put premium received will act as stock loss offset.Key Concepts – If stock trades down aggressively, you will only profit down to a stock price defined by the strike price minus option premium. If the stock continues down below that point (breakeven), you will incur lost opportunity. Further, if stock closes below strike price, stock will be assigned to you unless necessary adjustment is made. Time decay helps the position. Philosophically identical to Buy-Write except in opposite stock direction.Protective PutConstruction – Long stock, long 1 put per every 100 shares of stockFunction – To provide maximum downside protection for long stock position. Long stock insurance policy.Bias – Bullish but cautiousWhen to use – When wishing to protect profits of long stock position while wishing to retain position. Also, to protect speculative stock purchases (i.e. purchasing stock on potential chart break out from present trading range according to Technical Analysis.Profit Scenario – If stock continues to trade up by more than the amount paid for the puts. Once above that level, position makes dollar for dollar with stock.Loss Scenario - If the stock trades down, loss will be felt until stock reaches point defined by puts strike price minus put price. At that level, position will cease losing. If stock stagnates, loss will equal put price due to decay.Key Concepts – Due to the acquisition of time decay from the long put, the position is best used for protection of already existing profits, or when a potentially aggressive or explosive upside move in the near future is a good possibility. Other side of the Sell-Write position. Philosophically identical to the Synthetic Put strategy except for anticipation of stock going up.Synthetic PutConstruction – Short stock, long 1 call per every 100 shares of stockFunction – to provide maximum upside protection for a short stock position. Short stock insurance policy.Bias – Bearish but cautious.When to use – when wishing to protect profits of short stock position while continuing to retain short position. Also, to protect speculative stock sale (i.e. selling stock on potential chart break down through support from present trading range according to Technical Analysis.Profit Scenario – If stock continues to trade down by more than the amount paid for the calls. Once below that level, position makes dollar for dollar with stock.