The Optionist Gallery of Trades

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            Speculation—Buying puts and calls. This strategy is a proxy for owning a stock or shorting it… but the costs are much lower and the profit potential is much higher.  These simple strategies are out bread and butter plays. You will see a lot of them. These strategies frequently multiply the profit potential of a stock’s movement by tenfold.

            Capturing income—Covered calls and naked puts. Covered calls are only one way to use options to generate a stream of income as a “writer.” Have you been warned to never do naked puts because they are so dangerous? Somebody lied to you, or talked through his hat. Truth is, the risk:reward profile for a naked put and a covered call are identical.  Exactly the same. If you sold a covered call on a stock for $40, you have to hang on to the stock to see what happens. And if it zoomed up to $55, you’d lose a 37% profit when the option buyer called the stock away from you. But if you had to hold on to a $40 stock that fell to $6, it would be much worse. You’d be caught watching your stock lose 85% of its value. And it really happens. What’s more, good as covered calls are, and I like them with great stocks, you are twice as likely to have to surrender your stock (and lose you’re the profits you would have made) with a covered call compared to a naked put. Besides, you don’t have to take that much risk… I’ll give you a hedged alternative.

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            Hedging: Spreads and collars—Like the idea of collecting income writing options but afraid of too much risk? Combination strategies like a bull put spread or a collar will protect your downside. I present these plays as alternatives so you can choose the more conservative path whenever you want.

            Following the market—few signals are really clear on market direction and you can easily overtrade, but when they line up, we do puts and calls on indexes.

            Sector rotation—The bios go cold and gold stocks get hot… or vice versa. It happens all the time. Rather than trading a handful of stock options, you can capture these large turns with options on ETFs.

            Positioning for breakouts, or not—If the market or a stock is destined to go nowhere, most people groan. And if looks ready to pop, but in either direction, most people have no clue what to do. As an option player you can make money in these situations with straddles.