Articles

Covered Calls – Rolling Avoids Exercise But Invites Risk 

by Michael Thomsett

Covered call writers can avoid exercise by closing the call and replacing it with a later-expiring one. But some pitfalls may also occur along the way. The forward roll works because a later-expiring contract at the same strike is always worth more, due to higher time value. So you can always change out the short… [READ MORE]

The short gut spread

by Michael Thomsett

  The short “gut spread” combines the sale of an in-the-money call and an in-the-money put. They have the same underlying and expiration date. In comparison, a normal spread would combine out-of-the-money positions. This makes the short gut spread a high-risk strategy; but if time decay is used advantageously and the underlying price does not… [READ MORE]

The long gut spread

by Michael Thomsett

The long “gut spread” is a strategy involving the purchase of an in-the-money call and an in-the-money put. They have the same underlying and expiration date. In comparison, a normal spread would combine out-of-the-money positions. The gut spread is more expensive because both options are in the money. However, it combines limited risk with unlimited… [READ MORE]

Bollinger bands and the t-line

by Michael Thomsett

Options traders constantly seek that elusive, consistently dependable signal. But if you use a combination of two powerful signals, you might discover that getting a strong trend signal is not difficult at all. The two signals are Bollinger Bands and the t-line. Both are based on moving averages, but the bands include upper and lower… [READ MORE]

Covered calls, annualizing your return

by Michael Thomsett

When you compare two or more covered calls, the comparison is not always valid – even if the initial yield is identical. The holding period makes all the difference. Figuring out the true net return To calculate annualized return on a covered call, you first have to address a question: What is your basis for… [READ MORE]

Shorting stock – options are a better choice

by Michael Thomsett

Swing traders have a dilemma: Getting in with long positions at the bottom is easy, but shorting stock at the top is much more problematical. Swing trading is a popular and widely understood trading technique. Based on a three- to five-day short-term trend, you expect to see stock prices turn and reverse in a predictable… [READ MORE]

A Contrarian View

by Michael Thomsett

  A “contrarian” trader tends to time trades differently than the typical investor. What exactly does this mean? To many observers, being a contrarian is assumed to mean going against the majority in each case. But this is not accurate; in fact, the contrarian does not trade differently just to be contrary. There is a… [READ MORE]

Problems with Implied Volatility Calculations

by Michael Thomsett

Traders relying on implied volatility (IV) to time trades are relying on a deeply flawed calculation. The debate over whether to use implied or historical volatility is pointless. The one (historical volatility, or HV) is based on actual stock prices in the recent past. The other (IV) is an estimate of future option volatility based… [READ MORE]

Breakeven rate of return

by Michael Thomsett

Options traders tend to think about return almost exclusively, to the exclusion of other risk attributes within their control – cost, time, exposure, and personal bias. Return, however, is poorly understood even among seasoned traders. In setting goals for your options trades, how much return do you expect? How much do you need? Options solve… [READ MORE]

Ratio write versus covered call

by Michael Thomsett

The ratio write is an expansion of the covered call. At first glance, it does not seem that there is much difference between the two positions. There is considerable difference, however. The covered clal is based on a match between 100 shares of stock and one call. The ratio expands this. For example, in a… [READ MORE]

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