Stock Options Trading Strategies - Lean

Professional stock options traders use the term lean to refer to one's perception about the directional strength of the stock. When you own a stock option and intend to hold it for a period of time, you are aware that you will probably be holding it while it goes up and while it goes down.

This means that at any given moment in time, you might have a different opinion of the potential movement of that stock. Knowing this, there is a way to address your present level of confidence or "lean." You do this by your choice of which option you sell.

While it is true that the at-the-money option has the most amount of extrinsic value, it might not always be the ideal option to sell in every situation.

For instance, if you feel that the stock itself has a very high chance of producing capital appreciation above the potential amount of premium you could receive from selling an at-the-money call, then sell an out-of-the-money-call so you can allow yourself a little more room to the upside on the stock.

For example, let's say the stock is trading at $27.00. Normally, you would sell the 27.5 calls at say $1.00. If the stock were to rise quickly and eclipse the $28.50 mark, then with the buy-write strategy, your position would have maxed out at $28.50, and you would have a $1.50 one month gain. Not bad, but if the stock went to $29.50 then you would have missed out on another $1.00 profit. However, if we had sold the 30 calls for $.30 then we would have another outcome. You bought the stock at $27.00 and sold the 30 calls for $.30 and the stock goes to $29.50.

You would have made $2.50 in capital appreciation and $.30 in option premium for a total of a $2.80 return.

So, if you feel the stock has a real good shot at taking a run up, you can lean your position long by selling an out-of-the-money call.

If you have a more neutral view on your stock you would sell an at-the-money-call in order to receive a bigger premium which allows for greater downside protection if the stock trades down and higher potential profit if the stock becomes stagnant.

This strategy also works on the downside. If, by chance, you feel that the stock may trade down a bit during the life of the option, then you can sell an in-the-money-call. The effect of this would be to provide you with a little extra premium to cover more downside risk.

Remember when you sell an option you seek to capture extrinsic value. An in-the-money option not only has extrinsic value but also some intrinsic value.

When you feel that you want to lean your covered call strategy (buy-write) a little short, choose to sell an in-the-money call so you can also have some intrinsic value to cover your downside.

As an example, say your stock is trading at $29.00 and you feel that your stock may trade down a little but still remain in an uptrend cycle. You don't want to get rid of the stock but you also don't want to lose any money so you sell the 27.5 call at $2.00.

The stock starts to trade down and finishes at $26.00. If you had owned the stock naked, then you would have lost three dollars since you owned the stock at $29.00 and it closed at $26.00 on expiration.

However, because you sold the 27.5 calls at $2.00, you would only realize a $1.00 loss in the stock. The premium received will offset the loss due to the fact that you identified and adjusted for a likely move.

As you can see, the buy-write strategy can be altered to fit any directional view you have on your selected stock.

Finally, if you intend to use the buy-write strategy successfully, you generally need to sell the calls against your stock on a consistent, recurring interval, over a period of time.

This means that you will have to be prepared to roll your calls out to the next month come expiration. Sometimes, all you'll need to do is to sell the next month out call.

-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-
If You Would Like to Learn More About Stock Options
Responsibilities Then Discover How to Protect Your Investments
With the Leveraged Power of options & Learn How to Trade options
Like the Pros..

Click Here --> http://www.options-university.org
-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-

---

How to Find Value in No Load Mutual Fund Investing

What are you thinking when it comes to your no... Read More

No Load Mutual Funds: Investment Hype vs. Investment Help

With the internet such a huge part of our daily... Read More

Value Investing: Selecting From The Bargain Bin

Picking a beaten-down stock requires a different kind of selection... Read More

High Price/Earnings Ratios and the Stock Market: a Personal Odyssey

After some forty years of banking and investments, I retired... Read More

Alfred E. Newman

What! Me worry?Many of you remember the cover of MAD... Read More

Your Job

There are so many kinds of work that needs to... Read More

Smart Day Trading Strategies to Help You Make Money in the Stock Market

Stock trading can be a very profitable activity. You can... Read More

The Stock Market - How Just One Question Will Tell You All You Need To Know About Your Stock Broker

Last time we looked at the real performance of the... Read More

How Eating Bitumen Made Me a Better Trader

Trading is a fascinating activity.There are so many layers to... Read More

Oil Stocks CHK WLL - What Is Their Worth?

(1) CHK stock price $16.74, NAV $32.5CHK is my favorite... Read More

Trend Trading - Trading Stocks Using Technical Analysis and Swing Trading Strategies

Peter is a professional trader, Paul is not. Peter has... Read More

Wal-Mart: Discount Store, Discounted Stock?

As GuruFocus updates the stock buys and sells of gurus,... Read More

Cash Is A Position

I go to the Money Show every year to visit... Read More

Series 7 Exam

What is the Series 7 Exam? If you... Read More

Mid-Cap Stocks: Asset Class with an Identity Crisis

Much like the middle child, mid-cap stocks have long struggled... Read More

Bargain Basement - Finding Stocks That Go Up

Have you been listening to the talking heads on CNBC-TV?... Read More

Dont Spend Another Dollar on Business Opportunities Until You Read This

With an insecure job market, overworked employees, insufficient retirement savings... Read More

Buying Stocks and the Importance of Correct Timing

An investor can find and research the best stock on... Read More

Long Term Investing

In his wonderful book, 'Multiple Streams of Income', best selling... Read More

Planning Your Dive and Diving Your Plan ? Trading!

A colleague of mine just returned from a scuba diving... Read More

Your Trading Objective: Why is that so Important?

You've decided to try your luck at trading stocks or... Read More

Traders, Defend Against the Dreaded Death Spiral.

It has often been said that there is only two... Read More

The Exclusive Club of Large Caps

Picture one of those clubs where only the real heavyweights... Read More

Inverted Interest Rates

Inverted interest rates? What's that? Who cares? Even if you... Read More

Stock Trading Secrets?

How often have you come across an advertisement or e-mail... Read More

The Stock Market Investor?s Worst Enemy

Every stock market investor faces one primal enemy. An enemy... Read More

Two for the Money

Look back over the years and try to remember how... Read More

VooDoo Training For the Stock Market

If you go to Haiti or other places in the... Read More

Emotional Maturity

If you are going to be a winner in the... Read More

Paddle Your Canoe

At some time in your life you have been on... Read More

Finding A Good Stock

One of the things people are always asking me is... Read More

Discipline

One of the great "secrets" of successful people is discipline... Read More

Picking Mutual Funds to Outperform the Market

With over 6,000 mutual funds available, it may be tempting... Read More