The use of offsetting option positions creates "synthetic stock" - the no-cost or low-cost option combination behaves just like stock. The risks in the position, by the way, are the same as those risks in 100 shares, but for much less cash outlay.
So many traders are confused when they hear about "volatility." Why? Because there are so many different meanings of the word, five to be precise. Understanding the differences helps to manage options trading.
Most covered call writers know how to roll a covered call to avoid or defer exercise. But this can create unintended losses or even have serious tax consequences.
Traditional wisdom tells us that diversification is a foundation of wise portfolio management. Is this still true? Or are there ways around it? Can you put all your eggs in one basket without any risk of loss?
The world of options involves a complex jargon, listings, and nomenclature. Following is a suggested style guide for consistency is how options information should be expressed.
Options traders need to constantly revisit the issue of risk. No one can escape the various kinds of market risk, and options are exceptionally associated with this reality. Even though many strategies are very conservative, every trader needs to know the risk levels involved in a strategy -- before they commit cash.
Swing traders normally use shares of stock; but do they short sell to play a bearish trend? or do they hold and wait for the next bullish move? If they do, they're missing half of the swings. Options make more sense, anjd short optinos could make the most sense of all.
The insurance put protects your appreciated stock by limiting losses in the event of a price adjustment. But it only works under specific circumstances.
Are there two types of option premium? or three? Many define only intrinsic and time value, but the truly important portion of premium is neither of these.
Options traders have been cautioned from the beginning that uncovered options are always high-risk. But this belief should be challenged. It's not the nature of a strategy, but when it is opened or closed that determines risk.
Everyone heard about the problems at JPMorganChase - losing $2 billion or more writing "synthetic derivatives" - but what exactly does that mean?
I invite everyone to check out my options books ... these are written to provide useful education and strategic information on a range of strategies.