Options

Understanding Dividends

Dividends (either in cash or in shares) are paid by many companies to its shareholders, most often on a quarterly basis. Why should options traders care about dividends? Dividends are part of the options pricing model, and so that alone makes them relevant. But the real answer is that dividends can impact option price movement […]

Options

Options Trading Mistake #10: Legging into spread trades

Most beginning options traders try to leg into a spread by buying the option first and selling the second option at a later date. They're trying to lower the cost by a few pennies and it simply isn't worth the risk. Don't leg in if you want to trade a spread. For example, you might […]

Options

Buying a Put Option vs. Short Selling

If you're bearish on a stock, you can try to capitalize on your position in a few ways: Sell the stock, if you own it. Sell the stock, even if you don't own it, by borrowing shares via your brokerage firm. At a later date, you can buy the shares (hopefully at a lower price) […]

Options

Options Trading Mistake #1: Buying out-of-the-money (OTM) call options

It seems like a good place to start: buy a call option and see if you can pick a winner. Buying calls may feel safe because it matches the pattern you're used to following as an equity trader: buy low, sell high. However, buying OTM calls outright is one of the hardest ways to make […]

Options

Options Trading Mistake #2: Using an all-purpose strategy in different market conditions

Option trading is remarkably flexible. It can enable you to trade effectively in all kinds of market conditions. But you can only take advantage of this flexibility if you stay open to learning new strategies. Buying spreads offers a great way to capitalize on different market conditions. When you buy a spread it is also […]

Options

Tips for Writing Successful Covered Calls (Part 1)

What is a covered call? A covered call is an income-producing strategy where you sell or write call options against shares of stock you already own. Typically, you'll sell one contract for every 100 shares of stock. In exchange for selling the call options, you collect an option premium. But that premium comes with an […]

Options

Options Trading Mistake #3: Not having a definite exit plan prior to expiration

You've heard it a million times before. In trading options, just like stocks, it's critical to control your emotions. This doesn't mean swallowing your every fear in a super-human way. It's much simpler than that: have a plan to work, and work your plan. Planning your exit isn't just about minimizing loss on the downside. […]

Options

Tips for Writing Successful Covered Calls (Part 2)

What is assignment? If you sell a covered call, you're accepting an obligation in exchange for the option premium you collect. Your underlying shares of stock might be “called” away from you if the option buyer chooses to exercise. We say “might” here because it's not guaranteed that you'll be asked to honor this obligation. […]

Options

Options Trading Mistake #4: Making up for past losses with risky “Doubling up”

I've heard many option traders say they would never do something: _never buy really out-of-the-money options, _never sell in-the-money options. These absolutes seem silly — until you find yourself in a trade that's moved against you. All seasoned options traders have been there. Facing this scenario, you're often tempted to break all kinds of personal […]

Options

Tips for Writing Successful Covered Calls (Part 3)

Tip 2: Don't panic if you're assigned. If you're called upon to deliver stock, it can come as a surprise. Some covered call writers worry about losing a long-held stock position this way. But you have more choices in this situation than you may realize. Let's say you've bought 100 shares of XYZ per year […]