- Normally price rise, sell shares to realise profit. Price drop, buy more shares.
- BUT Alternative to waiting for price rally/ dip --> can use COVERED STRADDLE
--> call + put with the same strike price and expiration date
LONG STRADDLE
- Buy both call + put
- depending on the underlying stock's direction of movement, either the call will profit more than the put (vice versa)
SHORT STRADDLE
- write (sell) both call + put
- the hope is that the underlying stock does not move, and both options decline in price due to time decay
- earn from the premium collected when writing the 2 options
- if the underlying stock declines, put option kicks into effect, as a put writer (seller) , I have to buy back the stocks
- if the underlying stock rises, call option kicks into effect, people will wanna use the call option to buy the stocks at a lower price, as a call writer (seller), I have to sell the stocks at the promised price (strike price)
COVERED STRADDLE
- (long stock + cash) and short straddle
- can use the long stock to "cover" the Short Call part
- use the cash to "cover" (i.e. purchase) the Short Put part
2. Stock- Oriented Strategy - Stock Repair
- Stock price declines - rather than holding on to the stock and waiting for price rally - I can initiate "stock repair" by DOUBLING UP.
- i.e purchase an equal number of shares at the current, lower price
- this is to lower the average cost of purchase (lower B.E.P)
-But this strategy costs money, and if stock continues to decline, then double the loss
- Cheaper option to "stock repair" via Options
--> Buy 1 call and sell 2 calls at different strike price --> net should be zero cost
--> since we just wanna protect against stock declines, then buying calls is not an issue. If the stock drop to below strike price, then they expire worthless.
3. Stock- Oriented Strategy - alternative to buying stock on margin --> LEAPS
- LEAPS: long- term options --> expiration dates more than 9 months away & LEAPS have fewer strike prices than shorter- term options
- Why use LEAPS instead of buying stocks on margin?
--> lower cost, no margin call risk and lower delta
--> CONS: not able to receive dividends and unable to vote in corporate affairs *Credits: CBOE Options Institute Online Learning Center - Trading Strategies
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