Trade to Win: Proven Strategies to Make Money

Chapter 12. Options Strategies to Make Money

I have traded options for many years. You will recall that it was an options trade that caused me great grief in October 1987. Even though I still trade options, I use a different approach. That is, I respect risk and make much smaller, safer trades. Today, I am far wiser and would never dream of trading 1000 or so naked options. The gray on my head attests to the wisdom I have gained as each year has passed.

An option is a contract that gives the owner the right but not the obligation to engage in a future transaction of an underlying security at a specified price on or before a specified date. The option contract may be executed if the underlying security reaches the specified price or strike price set forth in the contract. For example, if the strike price for an option is $35, when the per-share stock price reaches the magic $35 mark, the strike price has been hit. If the option has not expired, the contract may be executed.

Options are unlike most other financial products in that options expire if they are not exercised. Options contracts for equities expire on the third Friday of their expiration month. The contract must be executed on or before the date specified in the contract. If the option is not executed on or before the expiration date, it becomes useless and is null and void.

There are two big categories or types of options: calls and puts. A call is a contract that allows the buyer to "call" the stock away from the seller ...