This is the strategy most often used by option
advisory services - to buy either a put or a
call with the intention of selling it back into the market
at a profit. This is the "bread-and-butter" trade for option services, and
many do nothing more than this simple strategy. Options can get complicated,
but you can keep it simple and still profit.
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A spread strategy is any option position
that has both long (bought) and short (sold)
options of the same type on the same
underlying security. It becomes a debit
spread when the cost of the long
position exceeds the sale proceeds from the
short position and, because your account is
debited, no margin is
required.
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A credit spread is essentially the opposite
of a debit spread - because the net cost of the short
position exceeds the sale proceeds from the
long position, money is credited to your brokerage account when you
enter the position. You will need to have a
margin enabled account if you want to trade them.
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A covered call is an option strategy in
which a call option is written (sold)
against a stock position you own on a
share-for-share basis. Often, both parts of this strategy
are done at the same time, in that you will
buy the shares and simultaneously sell
the options in what is known as a buy/write.
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A straddle is an option strategy whereby
the same number of puts and calls are purchased (long) or sold (short) with
the same strike price and the same expiration date. The strangle, on the other hand, differs slightly from the straddle in that the puts and calls
(either short or long) have different strike prices.
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A naked put is a short position in which you,
as the
writer (or seller) of the option, do not have a corresponding short
position in the underlying security. Because
of this, the position requires that you put
up margin from your account as security, in
which case you will need to have a margin
enabled account.
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There are a number of advisory services who
trade a variety of Indexes, either regularly or as supplemental to
their equity trading. These include the DOW, the NASDAQ, the S&P 500 and the
Russell 2000 and are traded either directly (through Index options) or
indirectly through their respective tracking stocks or mutual funds.
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LEAPS (Long-term Equity Anticipation
Securities) are stock or index
options with expiration dates up to three
years in the future. One
feature of LEAPS is that they give you the
right to sell options against them. Because of that, one of the most
common LEAP strategies is to buy a LEAP
option and then write
shorter term options against it.
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