El Filosofo Liberal

Components Short one front month call option and long one far month call option. (i.e. the option you sell is to be closer to expiration than the option you are buying). Risk / Reward Maximum Loss: Limited on both down and upside for market direction. Maximum Gain: Limited. Characteristics When to use: When you are bearish on volatility and neutral to bearish on market price. Note that with this payoff graph I have shown the net theoretical result only at the first expiration date when with the underlying trading at 100, which is the best result: the near month call will expire worthless and you will still have a long call ATM position. Traders use time spreads to take advantage of time decay - the property of options being a decaying asset. However, due to the risk involved in selling naked options, a time spread protects the position buy buying an option in the next month. The long back month option position offsets large losses that can result from being short options when the unde...

Anyone just starting out in covered calls needs to decide if they want to focus on an in-the-money (ITM) or an out-of-the-money (OTM) strategy. This is a significant decision that will have important effects on your long term success and that amount of success. Benefits of ITM (1) More Protection: ITM strategies obviously offer more downside protection than OTM. You will make the same amount if the stock goes up, stays flat, or goes down to a certain percentage that it is ITM. (%ITM is the % the stock must drop to reach the strike price {$purchased - $strike}/$purchase) This is a HUGE advantage because ITM systems are more forgiving of price fluctuations and mistakes on the trader's part. (2) Since an ITM trader is more likely to be called out at the end of the month, every month you will research and find the highest yielding CC positions that meet your requirements. Compared to an OTM strategy, you are more often left with the stock at the end of the month since it did not rise t...

Writing Covered Calls is a conservative strategy where you buy a stock that you would like to invest in and then write a call option against that stock. This is a cash generating strategy that not only offers downside protection that you otherwise wouldn't enjoy if you just bought the stock, but also gives you the ability to generate a consistent monthly income, for only minutes of your time. However as with all option trading strategies, there are pitfalls that you will need to avoid if you are to be consistently profitable. What if the stock price falls dramatically? Your calls really do nothing to protect you against losses as the market falls. Sure, you get to keep the premium from selling the call (when it expires worthless), but you still own the stock, which is now worth considerably less than what you paid for it. The problem then becomes that you will not be able to sell another call at the original strike price. Instead, the next time you will have to sell the call at a l...