Options Basics Part II Class 7

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1 Options Basics Part II Class 7 UD Osher OLLI Spring 2019 Rajeev A. Vaidya Guy Werner Disclaimer in plain language: Opinions are like noses, everyone has one! You are going to see mine today!! I am simply sharing my perspective. This is not investment advice or recommendation. Form your own opinion, make your own decisions. 1

2 Class # 7 Covered Calls and Buy-writes Continued work with candidates and positions Some additional thoughts on Buy-Writes Allan Ellman Blue Collar Investor Other sources of information Key take aways from Chris Reitman s talk Buying vs. Selling Options a summary 4/8/2019 Rajeev Vaidya - OLLI 2

3 Additional advice on CCs and BWs Allan Ellman Blue Collar Investor Website - Beginner s Corner Books Encyclopedia Covered Call Writing Selling Cash Secured Puts Exit Strategies for Covered Call Writing Cashing in on Covered Calls Newsletter / Permier Membership Weekly recommendations on CC/BW set-ups Many added benefits Investopedia - Tasty Trades Free ebook The Secret Side of Trading on the website. Street.com - CBOE Strategies summary on website. 3

4 Key takeaways Chris Reitman s talk Selling options is better than buying options. Managing the risk in a trade is the key to success. Disciplined Trading systems produce results. Learning how to do an individual trade is important Learning how to build a trading system is the key to success. 4

5 Buying vs. selling options Buying Options Right to buy or sell Limited risk loss of premium paid to buy the option Unlimited gain only limited by movement of the undelying Time erodes value for the buyer Must get the direction and the rate of movement of the underlying to make money > Many options traded expire worthless (70/21/9) Selling Options Obligation to buy or sell Limited gain premium received to sell the option Unlimited risk determined by the movement of the underlying Time creates value for the seller Multiple scenarios to make profits. Make money on options expiring worthless 5

6 Two situations limit risk in selling options You own the underlying and are willing to take the risk to sell it at the strike price Covered calls Enhance returns - Earn a premium while waiting to sell at a premium above the market price You intend to buy the underlying and are looking to buy it at a price lower than the market. Cash secured puts Enhance returns Earn a premium while waiting to buy the underlying at a price below the market. Two low risk options strategies to enhance returns in your equity portfolio 6

7 Low Risk Strategies Underlying Position Objective Strategy Good Result Cost / Risk Own the underlying Protect the downside Buy a covered Put Do not Own the Underlying Own the underlying Do not own the underlying Want to buy below market and produce income Sell above the market price, produce income and some downside protection Want to produce income with some downside protection and potential for capital gain. Sell a Cash secured Put Sell a covered Call Execute a Buy Write on a Call Protection against a decline in price Income and potential to buy a stock below current market price. Income, some downside protection. Income and capital gain in market vs. strike price. Premium paid for the Put Be ready to close the position or buy the underlying at the strike price. Upside over strike price if assigned. Downside if the underlying loses value. Capital intensity. 7

8 Covered calls Why write covered calls? Increase returns Call premium kept adds income over and above dividends. Lowers cost basis for the underlying by premium amount. Increases probability of achieving a higher than market target selling price Risk to the writer Risk of making less money - upside stock profit potential is limited No risk of losing money due to option sale 8

9 Buy Writes Why do Buy Writes? Produce short term capital gains / income Call premium kept adds income over and above dividends. Lowers cost basis for the underlying by premium amount. Upside to an OTM strike price is added profit. Any dividends before expiration date add to profits. Risk to the writer Risk of making less money - upside stock profit potential is limited Risk of losing money if the underlying declines in price. 9

10 Cash Secured Puts Why write cash secured puts? Increase returns Lowers cost basis for the underlying at purchase by premium amount. Increases probability of acquiring the underlying at a lower than market target selling price. Produce income Make money.. Buy with the goal to have the put expire worthless Risk to the writer Downside risk from stock price below strike price 10

11 Class Schedule 4/8/2019 Rajeev Vaidya - OLLI 11

12 Thanks!! Happy Investing!! My Class website 12

Options Basics Part II Class 8

Options Basics Part II Class 8 UD Osher OLLI Spring 2019 Rajeev A. Vaidya Guy Werner Disclaimer in plain language: Opinions are like noses, everyone has one! You are going to see mine today!! I am simply