Timing the market has proven to be very difficult if not altogether impossible. However creating opportunities to artificially accentuate further downward movement in a given stock one is looking to own is possible. If a stock of interest has substantially fallen yet not enough to pull the buy trigger, then one has an option to “buy” the stock at an even lower price at a later date while collecting a premium in the process. This is called a covered or secured put option. Leveraging covered or secured put options in opportunistic scenarios may augment overall portfolio returns while mitigating risk when looking to initiate a future position in an individual stock. Options are a form of derivative trading that traders can utilize in order to initiate a short or long position via the sale or purchase of contracts. In the event of a covered put, this is accomplished by leveraging the cash one currently has by selling a put contract against those funds for a premium. Traders may also initiate a short or long position via the purchase of option contracts to the underlying security. An option is a contract which gives the buyer of the contract the right, but not the obligation, to buy or sell an underlying security at a specified price on or before a specified date. The seller has the obligation to buy or sell the underlying security if the buyer exercises the option. An option that gives the owner the right to buy the security at a specific price is referred to as a call (bullish); an option that gives the right of the owner to sell the security at a specific price is referred to as a put (bearish). I will provide an overview of how a covered put is utilized and executed. Further details focusing on optimizing cash leverage (covered puts) and the ability to sell these types of options in a conservative way to generate cash while initiating positions in one’s portfolio will follow. Continue reading "Using Covered Puts To Trade Options"
Tag: Covered call options
Can A Covered Call Strategy On Netflix Bode Well For You Too?
Introduction
Netflix Inc. (NASDAQ:NFLX) is a very controversial high-flying growth stock with a nosebleed valuation as measured by traditional metrics such as the price-to-earnings multiple (P/E ratio) and the PEG ratio. Due to its rapid growth, expanding original programming, wrestling market share away from big cable companies, expansion into international markets and its overall ubiquity, it's easy to see why investors are willing to pay a premium. It's difficult to arrive at an accurate valuation based on traditional metrics for this media disruptor. Due to these factors and the difficulty of placing an accurate valuation on Netflix, options in the form of covered call writing may be an effective way to leverage this high-flier while mitigating downside risk. Netflix offers a confluence of volatility, liquidity and a high level of interest which gives rise to high yielding premiums on a bi-weekly or monthly basis. This confluence bodes well for those who are long Netflix and desire to leverage options trading to augment returns and mitigate risk throughout the volatile nature of Netflix’s stock. Netflix’s recent earnings disappointment underscores the value of covered call writing to mitigate losses and smooth out drastic moves in the underlying security.
Note: This article is backing my long position while opportunistically and quantitatively writing covered calls to mitigate downside risk and generate income. I provide my real life examples embedded into my long position as Netflix is intrinsically volatile.
Leveraging The Volatility In Netflix
Netflix is a highly volatile stock and swings of $10 per share (or ~8%) throughout the course of a day are all too often observed. These swings to the upside or downside can be difficult to stomach. However, one can leverage his position via writing covered call contracts to mitigate these swings while remaining long this volatile stock. Utilizing biweekly or monthly contacts one can expect to obtain a cash premium of roughly 3%-6% with a strike price that's within 3%-5% of the strike price (tables 1 and 2). Continue reading "Can A Covered Call Strategy On Netflix Bode Well For You Too?"
Unlocking The Power Of Covered Call Writing – Applying Theory To Empirical Practice
Introduction
Leveraging covered call options in opportunistic or conservative scenarios may augment overall portfolio returns while mitigating risk in a meaningful manner. In brief, options are a form of derivative trading that traders can utilize in order to initiate a short or long position via the sale or purchase of contacts. A call option is a contract which gives the buyer of the contract the right, but not the obligation, to buy the underlying security at a specified price on or before a specified date. The seller has the obligation to sell the underlying security if the buyer exercises the call option. A call option gives the owner (buyer) the right to buy the security at a specific price is referred to as a call (bullish); an option that gives the right of the owner to sell the security at a specific price is referred to as a put (bearish). In the event of a covered call, this is accomplished by leveraging the shares one currently owns by selling a call contact against those shares and collecting a premium. I will provide an overview of the theory vs. empirical practice based on my covered call activity during Q1 2016. Here, I’ll provide details focusing on optimizing stock leverage via covered calls. Emphasizing the ability to sell these types of options in an opportunistic, aggressive and disciplined manner to generate liquidity while accentuating returns and mitigating risk via empirical data.
A Few Characteristics To Keep In Mind For Covered Call Options Trading
An Aggressive Covered Call Options Strategy For Netflix
Netflix is a high-flying growth stock with a sky-high valuation based on its price-to-earnings multiple. Due to its rapid growth, expanding original programming, wrestling market share away from big cable companies, expansion into international markets and its overall ubiquity, it’s difficult to arrive at an accurate valuation based on traditional metrics. Due to these factors and the difficulty of placing an accurate valuation on Netflix, options in the form of aggressive covered call writing may be an effective way to leverage this high-flier while mitigating downside risk and generating additional income. Netflix offers a confluence of volatility, liquidity and a high level of interest which gives rise to high yielding premiums on a bi-weekly or monthly basis which bodes well for options trading. Selling aggressive covered call options (i.e. aligning the strike price at or near the current price) to generate current income may augment overall portfolio returns while mitigating risk. This may be particularly invaluable if one is long a highly volatile stock such as Netflix. Below, I’ll walk traders through an aggressive options trading strategy leveraging Netflix stock a proxy. Continue reading "An Aggressive Covered Call Options Strategy For Netflix"
Aggressive Covered Call Options Strategy To Generate Current Income
Selling aggressive covered call options (i.e. aligning the strike price at or near the current price) to generate current income may augment overall portfolio returns while mitigating risk. In brief, options are a form of derivative trading that traders can utilize in order to initiate a short or long position via the sale or purchase of contacts. In the event of a covered call, this is accomplished by leveraging the shares one currently owns by selling a call contact against those shares for a premium. An option is a contract that gives the buyer of the contract the right, but not the obligation, to buy or sell an underlying security at a specified price on or before a specified date. The seller has the obligation to buy or sell the underlying security if the buyer exercises the option. An option that gives the owner the right to buy the security at a specific price is referred to as a call (bullish); an option that gives the right of the owner to sell the security at a specific price is referred to as a put (bearish). I will provide an overview of how an aggressive covered call is utilized and executed to generate current income and mitigate risk. Further details focusing on actual examples of selling in-the-money covered calls and the ability to sell these types of options in an aggressive manner to generate cash in one’s portfolio will follow. Continue reading "Aggressive Covered Call Options Strategy To Generate Current Income"
