You hold the paper and expect a price increase, because you still believe in the Buy and Hold strategy ...
Let's suppose that this is the starting point. In the meantime, one of your friends told you that the options market provides revenue strategies in addition to holding existing shares. This sufficiently aroused your interest and you want to try it, but you do not know how to get started. Well, you are looking in the right place, because that's what we will discuss here. Or at least we’ll outline it, because a blog entry is certainly not long enough for a thorough discussion, it would require a bit more time and practice.
Let's suppose you bought 100 AAPL shares at a price of 189.27 yesterday. To do this, you spent a pretty hefty amount, 18,927 dollars. Weeks have passed and the paper has not made a very significant move. Let's suppose that 3-4 weeks passed and nothing really happened, the paper moved in a channel. At this point, the stock trader is becoming increasingly impatient, and he may want to sell the paper and look for another.
What can you do if you can handle options?
Let's suppose you decided at the beginning - when you bought the 100 AAPL shares - to add an option structure to your strategy. You do not want to be involved in anything too difficult, so you just plan to write out a simple call option. You know that writing out a Call is profitable, if the movement of the underlying product is balanced until maturity, and it is not called against you before maturity. Let's suppose you decide on the basis of technical analysis, that the price will not increase up to the level of 200 within a month, but if it does, you are willing to sell it at that level.
It is assumed that the price touches the 200 level within a month. In that case, the profit of a simple stock trader is: 20000-18927 = 1073 dollars.
A trader who is familiar with options trading has a very different profit. We assumed that he has written out a 200 Call for November and received 520 dollars for it. If the call option is executed in a couple of days before maturity at the 200 level, the majority of the time value has disappeared, ie. he earned approx. $500 on the transaction. Since it has been called against him, he had to sell the 100 AAPL shares, so his total profit is: 20,000 - 18,927 + 500 = 1573 dollars.
In other words, he earned 50% more than the stock trader, although both played for the same target price.
50% - that is quite a significant difference for simple stock trading, isn't it?
This certainly has downsides as well - like everything. Eg. if the rise is too fast, but you have written out a call option, that can significantly reduce the potential profit. The above idea works best on a sideways moving or volatile oscillating market.
By Gery Nagy
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