Option Trading Tips - Covered Call Cashflow

Written by James Thomas


Writing Covered Calls is a conservative strategy where you buy a stock that you would like to invest in and then write a call option against that stock.

This is a cash generating strategy that not only offers downside protection that you otherwise wouldn't enjoy if you just boughtrepparttar stock, but also gives yourepparttar 148748 ability to generate a consistent monthly income, for only minutes of your time.

However as with all option trading strategies, there are pitfalls that you will need to avoid if you are to be consistently profitable.

Here are a few tips that may help you write covered calls successfully.

Always checkrepparttar 148749 fundamentals ofrepparttar 148750 underlying stock and make sure that you would be happy to own even if options didn't exist.

A great resource for viewing fundamental 'ratings' for stocks is at http://www.morningstar.com

Don't enter a Covered Call trade just becauserepparttar 148751 option premium looks attractive. Higher option premiums (10-15% or more) often mean thatrepparttar 148752 stock is more volatile i.e. prone to huge price swings and therefore greater risk.

I personally targetrepparttar 148753 larger, more liquid and stable companies with monthly call option premiums betweenrepparttar 148754 3-6% range.

One of my personal favorites and a stock that I have had considerable success writing covered calls on overrepparttar 148755 years is Oracle (ORCL).

I've also had consistent success with Intel (INTC) and Nokia (NOK). At timesrepparttar 148756 Nasdaq Tracking Unit (QQQQ) is also attractive (a 3% yield isrepparttar 148757 highest I've ever seen it though).

Don't hold stocks at least 2 days either side of earnings announcements. Much ofrepparttar 148758 time expectations of good and even great earnings are already priced intorepparttar 148759 stock and shouldrepparttar 148760 stock fall short of expectations or even worse disappoint, a virtual bloodbath can follow. I've experienced declines of 30-50% in just a few days by holding my covered call stocks over earnings announcements.

Option Trading Tips - Credit Spread Magic

Written by James Thomas


You may or may not have heard of credit spread option trading but they can be used to profit in bullish, neutral or bearish conditions.

They are a cashflow generating strategy that involves bothrepparttar buying and selling of either calls or puts of different strike prices but same expiration date to establish an overall 'credit' i.e. spendable cash.

It is a great option trading strategy for taking advantage ofrepparttar 148747 'time decay' that option selling provides, but with limited risk.

The amount of potential profit of course is limited torepparttar 148748 credit received whenrepparttar 148749 trade is first made.

Let me give you an example of this powerful, yet underutilized option trading strategy.

Let's say thatrepparttar 148750 QQQQ (The Nasdaq 100 tracking unit) is trading at $30.50 and we believe that it will continue to go up in price.

To create a vertical credit spread using puts (selling puts is profitable ifrepparttar 148751 market rises), we could dorepparttar 148752 following:

1) Sellrepparttar 148753 $30 put (expiring this month).

and

2) Buyrepparttar 148754 $29 put (expiring this month).

TIP:

In my experience, it's always best to sell short-term, 'Out-of-the-money' option premium for 3 main reasons:

1) Out ofrepparttar 148755 money options have lower deltas, meaningrepparttar 148756 stock has to move further beforerepparttar 148757 value of our sold option increases (remember we want it to decrease).

2) Selling 'current month' options (30 days or less to expiry) is when time decay is at it's most rapid andrepparttar 148758 value of our sold option is eroding away with each day.

3) Contrary to buying options, ifrepparttar 148759 stock does moves very little or not at all, we win!

Letís say we received $0.90 cents per contract for sellingrepparttar 148760 $30 puts and we paid $0.40 cents per contract by buyingrepparttar 148761 $29 puts.

This transaction gives us an overall credit of $0.50 cents per contract ($0.90-$0.40).

If we sold 20 contracts ofrepparttar 148762 $30 Put and bought 20 contracts ofrepparttar 148763 $29 Put, this would give us a total credit of $1,000 (2000 shares x $0.50 cents).

So basically, if QQQQ expires at any price above $30 we will make our maximum profit, which isrepparttar 148764 initial credit we received ($0.50 cents).

Onrepparttar 148765 other hand if QQQQ expires at any price below our breakeven point of $28.50, we will be facing a loss.

Letís look at allrepparttar 148766 possibilities.

Once we have enteredrepparttar 148767 traderepparttar 148768 QQQQ can either:

1)Go up a little bit.

2)Go up a lot.

3)Go sideways.

4)Go down a little bit.

5)Go down a lot.

The beauty of this style of trading is that we will win in four out of five of these situations, and in many instances we can even win in all five!

Let me demonstrate how.

The QQQQ is trading at 30.50, if it moves up a little bit to say $30.80, our sold option ($30 Put) will expire worthless and we will keep all ofrepparttar 148769 premium.

Ifrepparttar 148770 QQQQ moves up a lot to say $32,repparttar 148771 same will occur and we will get to keeprepparttar 148772 premium.

Ifrepparttar 148773 QQQQ moves sideways and stays around $30.50, againrepparttar 148774 ($30 Put) will expire worthless and we will get to keeprepparttar 148775 premium.

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