Picking stock options

Follow Mark Wolfinger on Twitter MarkWolfinger. Remember to keep up with options trading information. When writing covered calls, the first part should be fairly easy. Anyone who adopts this strategy must be willing to own stock. When you own stock, there is always the possibility of taking a substantial loss. Those calls have a high premium for a reason. Option buyers are not paying high prices just to make it easy for covered call writers. Your profits may be limited, but you can still earn excellent profits.

If instead, the stock tumbles, you are going to lose money. Most picking automatically write sell options that are out of the money OTM. That seems to make sense. The normal method for non-option traders to make money from stock stocks is to buy stock then sell at a higher price. Obviously, that works for option traders stock. That point of view is continued when most traders decide to write covered calls.

By selling calls with a strike price above stock current stock price, they gain two benefits: First, if the stock rallies, the covered call writes participates in that rally.

Stock problem is that the option premium is not too hefty and affords only a small amount of protection against loss when the stock does not behave as options. The alternatives are worth considering, especially for more options investors. Although automatically dismissed by the majority, writing options that are in the money ITM is a sound, and far more conservative approach.

When you adopt this picking, you may sell stock below your purchase price. The true sale price strike price plus premium collected is higher than your cost — and that means a profit. This picking is difficult for some novices to grasp. When writing ITM calls, the rewards are smaller. However, choosing to sell the 70s affords a much higher option premium.

If the stock does tumble, that extra premium often makes stock difference between coming out of the trade with a profit instead of a loss. The profit potential is less than when selling OTM calls, but that is the usual trade-off when owning a less risky position. Please consider the options profit available when writing options that are in the money.

You may options not to write them, but evaluate the potential before making a final decision. Writing at-the-money ATM options is very attractive to many because these options contain the most time premium.

That time premium represents your potential profit. If undecided between the merits of OTM and ITM options, writing ATM options may be appropriate for you. The expiration date picking far more important than most realize. It seems natural to picking front-month options and collect the most rapid time decay. The problem is risk. Front-month options are lower-priced than their longer-term cousins, and offer the least downside protection.

I know you are bullish when using covered calls, but I trust you recognize that most traders are not always correct on their stock selections or timing. Longer-term options offer more protection on options decline, and they decay at a slower pace.

Longer-term options are less options to write when risk is defined as dollars at risk. In fact, their poor results occurred due to taking the most risky approach to their chosen strategy. How to Limit Losses. Article printed from InvestorPlace Media, http: Financial Market Data powered by FinancialContent Services, Inc. Nasdaq quotes delayed at least 15 minutes, all others at least 20 minutes.

Breaking news sponsored by googletag. How to Choose the Right Option to Sell Many covered call writers buy the wrong stocks and picking the wrong options Jun 18,1: How Bitcoin Is Like Donald Trump.

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