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Five Proven Options Strategies You Can Use Today

January 25, 2008

Former Floor Trader Reveals Strategies to Maximize Returns with Minimum Risk By Ron Ianieri

The proliferation of online brokerage firms combined with low commission costs has empowered the average retail investor to navigate the options market like never before. Despite their reputation for being risky and difficult to master, options can present a unique advantage to the individual trader. They provide increased cost efficiency and are not as risky as equities. Options can also offer higher percent returns than stocks and strategic alternatives.

“A mastery of options is very achievable if you learn the right way,” states Ron Ianieri, Chief Strategist of The Options University. The former Philadelphia Stock Exchange floor trader offers five proven strategies for maximum returns with minimum risk.

The Covered Call/Buy-Write Strategy
The covered call is a premium selling strategy with two components - stock and options. The stock component consists of a long stock position in which the investor owns stock. The options component consists of selling one call per every 100 shares of stock owned. One options contract is worth one hundred shares of stock, so the ratio of stock to calls must be exactly 100 shares to one option contract. The philosophy behind this strategy entails using a long stock position with a short call option to create a positive stream of additional income. “It is similar to person purchasing a house then leasing it to pay the mortgage,” says Ianieri.

The Protective Put Strategy
The protective put is a premium purchasing strategy that is ideal for an investor who wants full hedging coverage for their position. The investor buys the stock and put at a one-to-one ratio, meaning one put for every 100 shares. The protective put strategy is optimal for situations when the stock has a potential for an aggressive upward or downward move.

Stock Replacement/Covered Call Strategy
Consider 1,000 shares of a stock trading at $58, but an investor is unable to take advantage of this because of the capital requirement of $58,000. This is the time to consider using the stock replacement strategy. An alternative to purchasing the stock outright is to find a way to replace the actual stock with something that is not as expensive. In this case, that alternative is a deep-in-the-money call.

Vertical Spreads
Vertical spreads provide the buyer and seller an excellent percentage return while providing limited loss scenarios.

Time Spreads
The time spread strategy is excellent for premium sellers who want to capture a premium in a hedged way. It involves the purchase of one option and the sale of another in different months, with both having the same strike. Important elements in the construction of the time spread are: using two calls or two put options on the same stock, using the same strike for both, choosing different months for each, and using a one-to-one ratio.

While these strategies lay the groundwork for a successful entry into the options market, ongoing education is the best asset that any investor can have. Ensure your success by staying abreast of the latest information such as articles, classes and the advice of professionals.

Written by Brock Hamilton · Filed Under Option Strategy 

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U.S. Government Required Disclaimer - Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the options markets. Don't trade with money you can't afford to lose. This website is neither a solicitation nor an offer to Buy/Sell options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this website. The past performance of any trading system or methodology is not necessarily indicative of future results.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.