5. Managing Basic Option Positions

This chapter focuses on basic option positions—long calls or puts, short calls or puts, long straddles, covered calls or puts, and a variety of variants employing simple combinations of stock and options. The words basic and simple are misleading. Volatility swings, bid-ask spreads, earnings announcements, expiration cycles, liquidity, and a variety of other complex issues affect so-called simple trades just as they do complex ones. Every trade, large or small, simple or complex, requires the trader to select a strike price and an expiration month. Strike price selection is impacted by many variables, time and underlying volatility being the most prominent. Sometimes seemingly simple trades can become very ...

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