Keene on the Market: Trade to Win Using Unusual Options Activity, Volatility, and Earnings

CHAPTER 10

Call and Put Trading Strategies

Successful trading means successful trading strategies. The same is true with successful options trading strategies. In this chapter I discuss both bullish and bearish call and bullish and bearish put strategies that have worked well for me.

■ Long Calls

A long call option has a bullish outlook. In other words, if I think that the price of the underlying asset will be going up, and I am bullish on that asset, I would consider a long call strategy.

Long Call Strategy

Outlook	Bullish.
How to set up the trade	Purchase call option.
Advantages	Compared to outright buying stock, this strategy is much cheaper and provides greater leverage on our capital. Additionally, your risk is limited, but there is potential for unlimited reward.
Disadvantages	Potential for 100 percent loss of call value if it expires out-of-the-money. Call prices typically decline when volatility declines. Time is working against you.
Maximum risk	Capped to the price you paid for the call option.
Maximum reward	Unlimited.
Breakeven	Call strike plus price paid for call.
Time decay effect	Theta is negative and works against your option.
Volatility	An increase in implied volatility would help the price of the option and a decrease would hurt the price of the option.

Typically, using out-of-the-money calls is one of my least favorite strategies. Unless I get a parabolic move higher, these are typically very challenging to trade. This is for two reasons. ...