If, over the life of the contract, the asset value decreases, the buyer can simply elect not to exercise his/her right to buy/sell the asset. This strategy is implemented by purchasing a call option on a stock while shorting the stock. The total cost (the price) of an option is called the premium. If theoption is going to expire in-the-money and you want to keep thestock you will need to buy the short option back and sell thenext months call. The $65 Call is now $7 In-The-Money and its premium is now $8.00. Now, the most money you can loose over the month is the $1 you paid for the put while you still can participate in any upside so as long as the Starbucks (SBUX) is trading above $26 at expiration you have made a profit. An investor is willing to accept a larger risk in exchange for the option premiums received.For example: write XYZ June 20 Puts and Write XYZ June 30 Calls. Each listed option represents 100 shares of company stock, known as a contract. These will contain less option premium for writing the options but it is much less risky because the stock price will have to increase considerable for the option to be exercisable. On the other hand, if the price of the stock decreases, then the value of the put increases by one dollar for each dollar drop in the stock price below the strike price. The effect ofthis would be to provide you with a little extra premium tocover more downside risk. For more options strategy and Charts visually representing when each strategy should be used and what the potential risks and rewards are please visit my blog. The closer the call options strike price to the current market price of the stock the greater the level of protection against a price increase, but the greater protection comes at a higher cost. This strategy can work well when a major anticipated decision is about to be made for the stock: buy-back program, law suite, new technology, earnings reports, presidential election. Say you are interested in Apple (AAPL) and think that it will depreciate in value over the next month or remain the same. Buy out of the money put options: This affords lower cost and more leverage; however, a larger move in the stock price will be required to exercise.Buy in the money put options: This provides a better chance of making a profit but more dollars will be at risk since you must pay a greater premium. This is safer than buying either just a Call or just a Put. A Straddle strategy is more conservative and will profit whether the stock goes up or down. This strategy is implemented by writing a call option while simultaneously buying a call option with a lower strike price. The investor implementing this strategy will be expecting the underlying stock chosen to stay at or decrease below the strike price. Say you think Google (GOOG) will decrease in price over the next month. If the call is ever exercised, then you would receive the exercise price of the stock, which is the strike price of the call, as well the premium you received when you sold the call.
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If, over the life of the contract, the asset value decreases, the buyer can simply elect not to exercise his/her right to buy/sell the asset. This strategy is implemented by purchasing a call option on a stock while shorting the stock. The total cost (the price) of an option is called the premium
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