(Part 6 of ten-part series on Financial Truths)

Section 1: Intro to Options

Section 2: Professionals Sell More Options Than They Buy

Section 3: Sell a Covered Call Against a Long-Term Holding

Section 4: Sell a Naked Option

Section 5: Sell a Spread

Section 6: It’s Got Options, But Should You Really Trade It?

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Section 1: Intro to Options

  • Calls and Puts
  • Options are defined by: Type (call or put), ticker symbol, strike price, and expiration date
  • Intrinsic value vs. time value
  • Constructing a profit graph
  • Long Call

    Long Put

    Short Call

    Short Put

    Long Strangle

  • Certainty vs. Probability: If you can eliminate a certain range of prices from the range of likely outcomes, OR isolate a couple scenarios that are most likely to occur, you can set up a trade with options that captures that hypothesis

Section 2: Professionals Sell More Options Than They Buy

  • Options are a form of leverage
  • Do you want to be the bank or the borrower?
  • Buying time costs money

Section 3: Sell a Covered Call Against a Long-Term Holding

Section 4: Sell a Naked Option

    • Collect premium up-front
    • Hold cash or margin reserves to back the position until expiry
    • It’s possible to lose several times the premium you took in
    • Importance of position management
    • Example:

Section 5: Sell a Spread

  • Same as selling a naked option, except you also buy an option having the same expiration date and a more extreme strike price
  • Position has a net credit (premium in your pocket)
  • Advantages and disadvantages

Section 6: It’s Got Options, But Should You Really Trade It?

  • Bid-ask spread: don’t get ripped off
  • If premiums are very rich, ask why

 

Intro music by audionautix.com

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