options trading, page-27

Lindfield sorry to hear about your mother my thoughts are with you.

Raine with regards to doing a covered call strategy there are a few issues to be aware of.

1. You cap your potential profit by selling calls. This can be alleviated somewhat by selling Out of the Money calls but you will receive less premuim.

2.If the share price falls you will not be able to sell your stock without first buying back the call you sold.


An option strategy that I am currently playing around with is the following.

1 Buy the stock
2 buy a put for protection

If the stock rises the put expires worthless and I loose the cost of my put but hopefully gain on the stock rise.

Here's the twist.
If the stock drops I sell my put and buy another put at the current strikeprice. This should leave me with a small credit which inturn would be used to buy more stock.

In effect with the ebb and flow of the market one should be able to build up more shares in a given stock. Using the puts to fund these extra shares.

There are some obvious downsides to this strategy the biggest being if the market is flat for a long peroid of time the purchase of puts each month would be expensive. To try and eleviate this you could sell calls to help cover the costs of the puts.

I started this strategy on FMG this month and have covered the cost of this months and next months puts and still have a small paper profit. I had rolled up the puts to try and protect profit were possible. I currently have a 4.25 put for protection and have sold 4.75 calls. As of yet I have not got any extra shares.
In hindsight I would have been better just purchasing the shares so far. Also I wouldn't recommend trying this strategy on FMG due to big difference in the bid and ask spread when trying to purchase puts. Also brokerage fees can bite when rolling up your puts.

This strategy is also limited by ones TA skills obviously.
And is probably better suited to the US markets were the spreads on most stocks are alot tighter.