The covered call is widely understood as a straightforward strategy. However, calculating maximum profit, loss and breakeven are not quite as simple as some traders believe. Covered calls are not risk-free. There are two potential sources of loss. First is the “lost opportunity” occurring if and when the underlying moves far above the covered call’s… [READ MORE]

Short puts are identical to covered calls in the sense that market risk is the same. This is a bit more complex, however, because significant differences exist between the two. Four specific areas should be considered in the comparison: 1. Capital commitment. To open up a covered calls, you must own 100 shares of stock.… [READ MORE]

Continuing the discussion of short puts, one matter often overlooked in the discussion is the collateral discussion. The idea of “margin trading” has different meanings for short options than for trading stock. For options, margin is not only a vehicle for trading; it also refers to the collateral required in order to execute an uncovered… [READ MORE]

In the previous article, the benefits of short puts were described. A fairly safe strategy, market risk for uncovered puts is identical to market risk of covered calls. Also like covered calls, there is a specific risk involved. To avoid the worst aspect of risk, avoid having open short calls that do not expire until… [READ MORE]