What is an Option?
Most investors are looking for a way to either increase their returns or reduce their risk. Though options have the ability to do both these things, many people don’t understand what options are or how to use them. They also think that options are too difficult and complex to learn, though once learned, the endless supply of options combinations tends to be a blessing, not a curse. People who don’t understand options are missing out on the many strategies that can enhance returns and lessen risk. Read more
Cash-Covered Puts: Doing the Math

If you write a put on a stock and keep enough cash in your account to cover your maximum risk, you create a position known a “cash-covered put write.” There is no margin requirement on the cash-covered put and the position’s gain and loss profile is almost identical to the corresponding covered call (same stock, strike, and expiration). In this week’s report, using put and call examples from Bio-Rad Labs (BIO), we show you how these two strategies are basically equivalent.  We also discuss when cash-covered puts might be preferable to covered calls.

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A Primer on Put-Call Parity and How to Use It

This week, we review what are known as the put/call parity rules. If you know one rule - and you remember your high school algebra - you can quickly master all the rules. Mastery of these rules gives you a lot more flexibility when planning your option strategies.

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Option Spreads VI - The Diagonal Backspread

Often, when markets are panicked, lower strike short-term premiums are overpriced, while longer-term higher strike premiums are relatively cheap. The diagonal backspread offers you a way to take advantage of such a situation if you think that the stocks are likely to recover.

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Options Spreads V - The Backspread

This spread, which can often be established with little or no outlay of cash, and can offer you a way to participate in a rapidly rising stock with little downside risk.

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Options Spreads IV - Long Diagonal Spreads

These spreads consist of a longer-term option purchase (often a Leap) and a nearer-term option sale at a different strike price. These spreads can be very attractive alternatives to covered calls.

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Options Spreads III - Calendar Spreads

A typical calendar spread is the sale of a shorter-term option and the purchase of a longer-term one. These spreads often offer the average investor the chance to sell overpriced short-term premium with relatively little risk.

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Hedging with Bear Spreads

This particular hedge is attractive in times such as these when the demand for nominally cheap insurance is driving up the price of the lower strike puts.

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Hedging Stocks with Collars

Most people know that you can hedge a stock by buying a put or by writing a call on it. What is no so well known is that you can do both. This long stock + short + long put combination is known as a collar. 

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Hedging Stocks with Protective Puts

 These positions consist of owning the stock and buying a put to protect it. Not only are you insuring against losses, you are insuring against opportunity losses as well. Often this insurance is a lot cheaper than you think.

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