Horizontal spread is an option TRADING strategy which is created by simultaneously purchasing and writing two options on the same asset (stock) and strike price but different expiration you date. Horizontal strategy is most known ace Calendar spread because the options there are different expiration dates. Calendar spread, one of many different option spreads, is to neutral strategy.
You only make profit if the underlying price does not move to lot or only moves in a tight range. If the stock rises or drops to lot, you will not get profit because of the volatility. This is to not to not risk option strategy, but it does have low risk. There is not such thing as no risk option strategy. Calendar spread options strategy makes profit from the difference of option premium decay or the difference of implied volatility. Options which is near month expires will lose its value very fast. On to other hand, option which is farther month from expiring will lose its value slowly. Traders will implement to calendar spread by buying option which is farther out and selling a near month.
After some time they will review the position by buying the option they previously sell and selling the option they previously buy. This is also called spread TRADING. Investors can buy call options or buy put options with this strategy. But I prefer using put options because it is cheaper. I will give you an example. Share of a stock XYZ are trading at $50 . To create a calendar spread, you want to buy September $50 call and sell August $50 call. The September call will COST you $6 and August call will give you $4. The $2 spread is the total cost of the strategy. For this strategy to work, you will want August call to lose its VALUE to faster than September call.
In July the options might look like this. August call will worth $1 and September call will worth $4. Your spread will will increase to $3. You profit will sees the spread difference which is $1. In order to work the underlying stock price must remain stable. Any drop or rise will affect the Time VALUE and option price. Calendar spread sees used to make monthly income and that’ s why it is called income strategy. You don’ t need the stock to move to be successful.
For best candidate this strategy looks for channeling or sideways stocks. Those stocks tend to move in a small range. Here are some tips when choosing the stock: Don’ t choose volatile industry like technology or commodity companies. Don’ t have earning release in the coming months. For the news or the their website for possible take to over or mergers.
Option trading is typically associated with three different investor types.
There are hedging strategies employed by large institutional investors, income-producing strategies for cash flow investors, and more aggressive trading strategies favored by speculators. But where the does the long term investor fit in?
Are there any option trading strategies that the conservative investor can employ to enhance his or her long term returns? In fact, there are. Leveraged Investing There are actually a number of option trading strategies that can be employed by the long term investor. Leveraged Investing is the name I’ve given this approach, and these are the strategies I use myself.
The point of Leveraged Investing is to use options to acquire stock for a discount and then to generate additional returns above and beyond the actual performance of the stock itself. Here are just two examples: [Please note: in the interest of simplicity, commissions have been excluded from all examples. ]
Example #1 – Writing Covered Calls. Writing covered calls is a popular, and generally conservative, income-producing strategy. A call option gives the holder the right, but not the obligation, to purchase 100 shares of the underlying stock at a certain price (strike price) by a certain date (expiration date). Conversely, when you write, or sell, a call option on shares that you own, you sell (you receive a premium in the form of cash) someone else the right to purchase your stock at a certain price at or prior to the expiration date. If you own 100 shares of a stock trading at $28/share, you could write a $30 covered call expiring in one month. If the stock closes above $30/share, you’ll be obligated to sell your shares for $30/share. But if the stock closes at or below $30/share, the call option will expire worthless and you’re free to repeat the process. Either way, the premium received is yours to keep.
Writing covered calls is a great way to generate additional income from your investments, but the long term investor must take extra precautions to avoid being called out and forced to sell his or her long term holdings (I call one such precaution, The 1/3 Covered Call Writing Strategy–it basically consists of writing covered calls on only a portion of your portfolio in order to give yourself greater flexibility and protection against sharp moves higher by the stock).
Example #2 – Writing Puts to Acquire Stock at a Discount. A put option, in contrast, gives the holder the right, but not the obligation, to sell 100 shares of the underlying stock at a certain price by a certain date. When you write, or sell, a put, you’re essentially insuring someone else’s shares against a drop below the agreed upon strike price. Like writing covered calls, writing puts can be a great source of income. In fact, the risk-reward profiles for writing puts and writing covered calls are essentially the same. Whereas call writers may write calls out of the money, at the money, or even in the money (the most conservative approach), put writers will typically write out of the money puts (e. g. writing a put with a $30 strike price on a stock currently trading at $32/share).
But for the long term investor, income is of less importance than the opportunity to buy a stock at a lower price that what it’s currently trading at. Writing an at the money put will greatly improve the likelihood of acquiring the stock, and you’ll also receive the most pure premium. Example: Suppose you write an at the money put on a stock that you really like. If the stock is trading at $30/share and you write the put at the $30 strike price for, let’s say, $2. 50 in premium (or $250 in cash since each option contract represents 100 shares of the underlying stock) you’re setting yourself up for a win-win situation.
That’s not to say you can’t lose money on the deal, but look at the two possible scenarios. If the stock closes at $30/share or higher, you keep the original premium you received (which, in our example, represents an approximate 8% return in one month). You’re then free to write another at the money put for additional premium. If the stock closes below $30/share, factoring in the premium you received, you end up purchasing the stock for $27. 50/share. Obviously, if the stock gets cut in half, the premium you received will be small consolation, but what if the stock merely slips down to $29. 50/share? You thought it was a good deal at $30/share and now you’ve acquired it for $2. 50/share less.
As they say, options involve risk and may not be suitable for everyone. But not all option trading strategies have to be high risk propositions. Some approaches, in fact, may offer substantial benefits for the conservative investor. If you are a long term investor, it may be worth your while to conduct additional research to see if there should be a place in your portfolio for options.
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