Selling Options Buying
Options Option Greeks
Most options expire out of the money and worthless; therefore most traders
lose when buying options. Heritage West still believes there is opportunity
in buying options; however, you must be very selective. We don’t believe
in buying options just because a market is extremely high or low. One must
consider the fundamental and technical conditions of the market, along with
historic and statistical option volatility and all other significant trading
factors. Remember, though, the key factor is still going to be picking the
correct market direction. There are usually several different trading scenarios
and strategies to take advantage of an emerging profit opportunity. We will
help you implement the correct strategies to suit your objectives and risk
parameters. There are strategies that combine both futures and options designed
to mitigate risk while still providing significant profit potential.
Bull call or bear put spreads involve
the writing and buying of options at the same time. If corn were trading at
240, we could buy one corn 240 call and write one 280 call with the anticipation
of corn trending higher. The 280 call sold would subsidize the 240 call, and
likely produce a much better risk to reward ratio. The profit is limited to
the difference between the 240 and 280 strike prices, less the net premium
Ratio spreads involve buying calls or puts and writing multiple calls or puts that subsidize or even pay in full
for the options purchased. If corn were trading at 240, we could buy one corn 240 call and write two 280 calls with the same expiration date. This would be in anticipation of corn trending higher, but not above 280 before option
expiration. We'd be collecting the same amount of premium as the option purchased, so even if corn continued lower we'd lose nothing. Our highest profit would be attained at 280 based on option expiration. We would have 40 cents or $2,000
gross profit on the one 240 corn call we purchased and the two 280 calls sold would expire worthless. Above 240 we would give back our profit penny for penny up to 320, our break-even point based on option expiration. There is risk on the one uncovered 280 call above 320, based on expiration. Above that point we would lose penny for penny.
Questions? Speak with a Heritage West Professional
Heritage West Financial, Inc.
8775 Aero Dr., Suite 302
San Diego, CA 92123
Local: (858) 560-2646
Toll Free: (800) 263-3004
TRADING FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.