Stock Options

Everyone is scared off Stock Options. They are supposed to be very risky and very complicated. That's true actually. But if you have some patience to read through the nomenclature and have some risk appetite, then options could be financially rewarding.

Selling Puts: Someone else can "Put" a stock into your account at the strike price. (Bullish..discount for stock buying)

Selling Calls: Someone else can "call" stock from your account forcibly. (Bearish..income source and tax puts)

Buying Calls: You buy right to own a stock (Bullish...)

Buying Puts: You buy right to sell a stock. (Bearish...insurance/protection)

Selling Puts to Own the Stock
1) Do your stock research first. Pick a good stock you would want to own.

2) Once you decide which stock to own, go to yahoo finance and look at the Option chain for that stock. Look at Puts.

3) Look at the current trading price of the stock and then the puts for that price.

4) Sell puts few contracts (depending on how much you can buy of that stock), each contract = 100 shares. Strike price you pick could be

• a) Such that Strike - premium <>
• b) If you don't want to own the stock right away, then pick Strike price - Premium <<<>

5) If you want to own the stock immly, pick immediate expiration, if not pick at least 6 months apart.

6) If you think stock could get hammered, buy some puts as insurance.

7) If put expires and does not get exercised, then you must decide if you want to sell another put or you want to directly buy the stock.

Once you own the stock: (at least 100 shares): Sell Calls to sell stock:

1) Start selling some calls to make monthly income.

2) Sell calls such that...Strike Price - Premium > Your stock purchase price.

3) If you want to sell immediately(don't want the call to be exercised), then you can choose Strike Price = your purchase price or even Strike - Premium = your purchase price. (no profit)

4) If you don't want to sell the stock immly, then select call such that Strike - Premium >>>>>your purchase price.

5) If you pick long expiration, then you may not be able to get monthly income. you might get a big lump sum once. That should depend on stock volatility. If stock trades within a small range (highly volatile) then you might want to sell calls monthly to make regular smooth income vs one time.

Risks:

Selling Puts: If underlying stock goes down, probability of exercise goes up. Hence if you don't want to own the stock, this is a risky strategy. Also, if you pick too high a strike price, you might own the stock for a much higher price that current price.

Selling Calls: If underlying stock goes up, value of the call goes down and probability of exercise goes up. If you don't already own the underlying stock, you could get in big trouble. One should always sell Covered Calls.