Example of using an option


Could I have done a little better on the timing?

OPTIONS Trading Basics - Explained with Practical Examples!

This is a great example of how the closer to your strike price that a stock ends the expiration cycle at, the more lucrative and flexible future rolls become. I closed out the trade for a couple of reasons. The primary reason was to find a way to wrap up this example at a nice chronological stopping point i.

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And I was alos willing to close the trade nearly three weeks early, because the final net premium income that I ended up booking resulted in a slightly strategy options for 1m annualized example of using an option Although, I've been able to maintain net premium credits month after month even as I've worked to lower the strike prices on the rolls which sometimes required I expand the total number of short putsit's still nice from a psychological standpoint to step back, claim victory, and know that I finally have zero exposure on the trade.

Once the puts are at the money or close to it whether the stock rebounds or you have to lower the strike price on rolls yourself the trade really begins to works in your favor.

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In this example, I was able to generate substantially higher returns while simultaneously reducing overall risk i. Summary of PEP option trades The above option trading examples are a terrific illustration of how option trading, when used conservatively, methodically, in conjunction with high quality businesses, and all without panicking when things seem to go the wrong way, can still generate lucrative returns even as the trade seemingly goes against you and even as I failed to always make the best adjustments in hindsight.

By the end ofthe trade was in much better shape than it was over the previous several months.

For example, a call option goes up in price when the price of the underlying stock rises. And you don't have to own the stock to profit from the price rise of the stock.

Compare my results since September of to the hypothetical investor who purchased shares at that time. At the end ofthe share price was essentially flat.

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The only income he or she would have seen would have been in the form of dividends. Big deal, right? Don't look at the small number - look at the huge implications behind that small number. In effect, it would be income manufactured out of thin air.

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And what happens when you multiply the above over a full portfolio and over a full lifetime of investing? Do you see now why I am so optimistic about the future?

Regardless of the zigs here and the zags there, I remain confident that I will always be able to meet one of either two objectives - continue to generate additional booked premium income, or if the options trade in the money, continue to lower the strike price on future rolling trades until the short puts eventually expire worthless, at which point I can then write new trades at a more advantageous strike price and subsequently generate much higher levels of premium income.

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No matter what, I expect to come out ahead of those investors who simply bought on the open market. And the premium income I've received and will continue to receive in the future example of using an option me many advantageous choices - from buying X amount of free shares matching the net premium received to date to allowing me to define the exact amount of a discount on X mumber of shares I choose to purchase to even retaining the total premium amount as personal income.

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Finally, please remember that the above is what I consider a worst case example of Leveraged Investing. What other system or approach allows you to generate these kind of returns even when you're wrong?

That's because when you focus on only the highest quality companiesin my opinion, the downside is significantly limited because even in volatile and declining markets, the share price on high quality companies declines less and rebounds more quickly than most of the market's other average choices.

  • Put Options With Examples of Long, Short, Buy, Sell
  • Whether you prefer to play the stock market or invest in an Exchange Traded Fund ETF or two, you probably know the basics of a variety of securities.