Stock Options Trading Strategies - Lean

Professional stock options traders use the term lean to refer to one's perception about the directional strength of the stock. When you own a stock option and intend to hold it for a period of time, you are aware that you will probably be holding it while it goes up and while it goes down.

This means that at any given moment in time, you might have a different opinion of the potential movement of that stock. Knowing this, there is a way to address your present level of confidence or "lean." You do this by your choice of which option you sell.

While it is true that the at-the-money option has the most amount of extrinsic value, it might not always be the ideal option to sell in every situation.

For instance, if you feel that the stock itself has a very high chance of producing capital appreciation above the potential amount of premium you could receive from selling an at-the-money call, then sell an out-of-the-money-call so you can allow yourself a little more room to the upside on the stock.

For example, let's say the stock is trading at $27.00. Normally, you would sell the 27.5 calls at say $1.00. If the stock were to rise quickly and eclipse the $28.50 mark, then with the buy-write strategy, your position would have maxed out at $28.50, and you would have a $1.50 one month gain. Not bad, but if the stock went to $29.50 then you would have missed out on another $1.00 profit. However, if we had sold the 30 calls for $.30 then we would have another outcome. You bought the stock at $27.00 and sold the 30 calls for $.30 and the stock goes to $29.50.

You would have made $2.50 in capital appreciation and $.30 in option premium for a total of a $2.80 return.

So, if you feel the stock has a real good shot at taking a run up, you can lean your position long by selling an out-of-the-money call.

If you have a more neutral view on your stock you would sell an at-the-money-call in order to receive a bigger premium which allows for greater downside protection if the stock trades down and higher potential profit if the stock becomes stagnant.

This strategy also works on the downside. If, by chance, you feel that the stock may trade down a bit during the life of the option, then you can sell an in-the-money-call. The effect of this would be to provide you with a little extra premium to cover more downside risk.

Remember when you sell an option you seek to capture extrinsic value. An in-the-money option not only has extrinsic value but also some intrinsic value.

When you feel that you want to lean your covered call strategy (buy-write) a little short, choose to sell an in-the-money call so you can also have some intrinsic value to cover your downside.

As an example, say your stock is trading at $29.00 and you feel that your stock may trade down a little but still remain in an uptrend cycle. You don't want to get rid of the stock but you also don't want to lose any money so you sell the 27.5 call at $2.00.

The stock starts to trade down and finishes at $26.00. If you had owned the stock naked, then you would have lost three dollars since you owned the stock at $29.00 and it closed at $26.00 on expiration.

However, because you sold the 27.5 calls at $2.00, you would only realize a $1.00 loss in the stock. The premium received will offset the loss due to the fact that you identified and adjusted for a likely move.

As you can see, the buy-write strategy can be altered to fit any directional view you have on your selected stock.

Finally, if you intend to use the buy-write strategy successfully, you generally need to sell the calls against your stock on a consistent, recurring interval, over a period of time.

This means that you will have to be prepared to roll your calls out to the next month come expiration. Sometimes, all you'll need to do is to sell the next month out call.

-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-
If You Would Like to Learn More About Stock Options
Responsibilities Then Discover How to Protect Your Investments
With the Leveraged Power of options & Learn How to Trade options
Like the Pros..

Click Here --> http://www.options-university.org
-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-

Company News for July 30, 2010 Zacks.com ... beat the market and provide a positive return. My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank. and more »

TPMMuckraker (blog)

Charlie Rangel's Ethics Trial: How Did He Get Here? TPMMuckraker (blog) According to the committee, he had failed to disclose a slew of assets: a credit union account, stocks, mutual funds, vacant lots in New Jersey. ... and more »

Morningstar Announces Speakers and Agenda for Inaugural ETF Invest Conference ... PR Newswire (press release) Morningstar provides data on approximately 360000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global ... and more »

Morningstar, Inc. Reports Second-Quarter 2010 Financial Results MarketWatch (press release) Morningstar provides data on approximately 360000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global ... and more »

Irish Stocks You Can Actually Buy msnbc.com ... globalized and economies become more entwined, it's impossible to ignore the importance of investing in international stocks. Mutual funds, index funds, ... and more »

Jul 29: Initial Claims Fall Zacks.com ... beat the market and provide a positive return. My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Morningstar Reports Hedge Fund Performance for the Second Quarter of 2010 ... PR Newswire (press release) Morningstar provides data on approximately 360000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global ... and more »

Despite progress, women still make these 3 crucial financial mistakes WalletPop (blog) ... are behind in saving for retirement and admit being mystified by various financial products, such as stocks, mutual funds and annuities. ... and more »

Alcoa, Ma'aden Set Sights High TheStreet.com ... the Karvy group (www.karvy.com), provides specialized research in asset classes including stocks, mutual funds and insurance to leading Wall Street firms.

Standard Chartered, HSBC to Offer Higher-Yielding Yuan Products BusinessWeek “A variety of RMB-based financial products is likely to emerge in Hong Kong, including deposits and loans, insurance, stocks, mutual funds as well as ... and more »