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
|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.|
|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. ...