c12 JWBT016-Busby September 30, 2008 14:21 Printer: TBD
132 STRATEGIES TO WIN
the option. You are able to get a low risk trade, finance it, and see if your
analysis will pay.Options May Offer Protection
At DTI, we suggest that you never trade without a stop. Using stop/loss
orders offers some protection for a market that misbehaves. However, an-
other way to get protection is by using options. Stocks may gap down and
there may be a large amount of slippage. Even with a stop/loss order, a
great deal of money may be lost. However, if you have an option, it may be
executed at the strike price regardless of the slippage. Some stocks do not
have options. If your stocks do, using options may offer an advantage.An Income-Producing Strategy
A covered call is a short call option position in which the seller of the call
owns the underlying stock or security. Covered calls carry less risk. If the
strike price is hit and the contract must be executed, the seller of the op-
tion simply sells what he already owns. To make money from stock that
is already owned, you must first locate one that has a tradable option. Re-
member that not all stocks have options. A great source for gaining this
information is OptionsXpress.
Once the stock is identified and you own the stock you may sell the
option for a premium. The premium is cash coming to you that you can
keep. If the strike price is not hit, you also keep the stock. If the strike
price is hit, you are able to keep the premium but must fulfill the contract
by giving up the stock to the owner of the option at the established price.
There is clearly less risk associated with this strategy. There are few times
in life when you can “have your cake and eat it, too.” However, if the strike
price is not hit in the above scenario that is exactly the way it works out.
If you try this strategy, it is suggested that you sell calls two months
out. Options only go out three months. Sell the option at a point where you
feel comfortable about getting out of the stock with a profit. The steps for
executing this strategy are:Own the stock.
Sell a call against the stock.
Collect the premium.
If the strike price is not hit, keep both the premium and the stock.
If the strike price is hit, you will keep the premium and also make
money on the appreciated price of the stock (the price has gone up
to the strike price and you are selling the stock at the higher price to
the owner of the option).