Best stock option strategies
If you set up a diversified portfolio, most of the time you will just collect premiums, which will enhance your income. Most investors find options confusing, but they really are not. And the possibility of significantly enhanced income makes it worthwhile for investors to at least understand the opportunity that exists. Filed under Investing Investing Pro. Use stocks you would be comfortable owning This is perhaps the key thing to remember. Suddenly, a relatively secure blue-chip stock turns into an income machine Remember that call writing is an income-generating strategy, not a strategy to add even more stress to your investment life.
Three behaviours investors should avoid, especially in turbulent times 5 things to do before watching your portfolio crumble 5 risk management investing strategies that could blow up in your face Sell options on stocks that pay a dividend Getty Images Since call writing is designed to boost your income, selling options on companies that pay dividends can potentially boost it even more.
Suddenly, a relatively secure blue-chip stock turns into an income machine. The more volatile the stock, the higher the premium on options Target companies with high amounts of cash and little debt Another key to an options strategy is to limit your downside risk, and what better way to do that than to use companies that have no debt and lots of excess cash?
Choose stocks that are more volatile than the market Bloomberg Options premiums depend on volatility: Only use short-term options This is the second-most important point behind owning companies you are comfortable with. The average term TransCanada awarded for space following a recent open season bidding process was years — longer than any pipeline is regulated to last.
RBC says despite hot housing markets in B. Everything free has a cost. Enbridge's name turned up times as a client for lobbyists to the U. Thus, the higher priced option is sold, and a less expensive, further out of the money option is bought. This strategy has a market bias call spread is bearish and put spread is bullish with limited profits and limited losses.
A position that consists of one call credit spread and one put credit spread. Again, gains and losses are limited.
Diagonal or double diagonal spread. These are spreads in which the options have different strike prices and different expiration dates. The option bought expires later than the option sold 2. The option bought is further out of the money than the option sold. The likelihood of consistently making money when buying options is small, and I cannot recommend that strategy. This is a simple, but relatively expensive, strategy that is suitable for beginners. Two transactions are involved to create a debit spread.
This more complicated strategy is suitable for when your outlook is volatile but you think a price rise is more likely than a price fall. Two transactions are used to create a credit spread and it is not recommended for beginners. This is a slightly complex strategy that you would use if your outlook is volatile but you favour a price fall over a price rise. A credit spread is created using two transactions and it is not suitable for beginners. Short Calendar Call Spread.
This is an advanced strategy that involves two transactions. It creates a credit spread and is not recommended for beginners. Short Calendar Put Spread. This is an advanced strategy that is not suitable for beginners. It involves two transactions and creates a credit spread. This complex strategy involves three transactions and creates a credit spread. It isn't suitable for beginners. This advanced strategy involves four transactions.
A credit spread is created and it isn't suitable for beginners. This is a complex trading strategy that involves four transactions to create a credit spread.
It isn't recommended for beginners. Reverse Iron Butterfly Spread. There are four transactions involved in this, which create a debit spread. It's complex and not recommended for beginners. Reverse Iron Condor Spread.
This advanced strategy creates a debit spread and involves four transactions. Reverse Iron Albatross Spread. This is a complex trading strategy that is not suitable for beginners. It creates a debit spread using four transactions. Volatile Options Trading Strategies Options trading has two big advantages over almost every other form of trading.
Section Contents Quick Links. What are Volatile Options Trading Strategies?