Bull Call Spread: An Alternative to the Covered CallĪs an alternative to writing covered calls, one can enter a bull call spread forĪ similar profit potential but with significantly less capital requirement. This isīecause the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. Effect of Dividends on Option PricingĬash dividends issued by stocks have big impact on their option prices. Then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. If you are investing the Peter Lynch style, trying to predict the next multi-bagger, Investing in Growth Stocks using LEAPS® options
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What are Binary Options and How to Trade Them?Īlso known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. Stock as a means to acquire it at a discount. You may want to consider writing put options on the Purchase the stock but feels that it is slightly overvalued at the moment, then If you are very bullish on a particular stock for the long term and is looking to Off can occur even though the earnings report is good if investors had expected Many a times, stock price gap up or down following the quarterly earnings reportīut often, the direction of the movement can be unpredictable. Buying Straddles into Earningsīuying straddles is a great way to play earnings. The following strategies are similar to the condor in that they are also low volatility strategies that have limited profit potential and limited risk. If you make multi-legged options trades frequently, you should check out the brokerage firm where they charge a low fee of only $0.15 per contract (+$4.95 per trade). Their effect is even more pronounced for the condor as there are 4 legs involved in this trade compared to simpler strategies like the vertical spreads which have only 2 legs. CommissionsĬommission charges can make a significant impact to overall profit or loss when implementing option spreads strategies. Note: While we have covered the use of this strategy with reference to stock options, the condor is equally applicable using ETF options, index options as well as options on futures. In this example, maximum profit isĪchieved if the underlying stock price at expiration is anywhere between $40 and The maximum profit for the condor trade may be low in relation to other trading strategiesīut it has a comparatively wider profit zone. $1000 to offset the short JUL 40 call valued at $500 and the initial debit JUL 35 call and the JUL 40 call expires in the money. If instead on expiration in July, XYZ stock is still trading at $45, only the Loss that is equal to the $300 initial debit taken when entering the trade. Thus, the long condor trader still suffers the maximum $2000 is used to offset the loss from the short JUL 40 call (worth $1500) and the To further see why $300 is the maximum possible loss, lets examine what happensĪt $35, all the options expire worthless, so the initial debit taken of $300 isĪt $55, the long JUL 55 call expires worthless while the long JUL 35 call worth To enter the trade is $300, which is also his maximum possible loss. JUL 50 call for $200 and buying another JUL 55 call for $100. An options trader enters a condor trade by buying a JUL 35 call for $1100, writing a JUL 40 call for $700, writing another
Suppose XYZ stock is trading at $45 in June. Lower Breakeven Point = Strike Price of Lowest Strike Long Call + Net Premium Received.Upper Breakeven Point = Strike Price of Highest Strike Long Call - Net Premium Received.The breakeven points can be calculated using the following formulae. There are 2 break-even points for the condor position. Max Loss Occurs When Price of Underlying = Strike Price of Higher Strike Long Call.Max Loss = Net Premium Paid + Commissions Paid.The formula for calculating maximum loss is given below: Or above the highest strike price of all the options involved.
Is at or below the lowest strike price and also occurs when the stock price is at It happens when the underlying stock price on expiration date The maximum possible loss for a long condor option strategy is equal to the initial debit taken whenĮntering the trade.
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