Stock Option Trading - Stock Options Investing
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Long Calls and Puts...
» Buying a Call option which gives you the right to BUY shares of stock at the selected strike price.
» Buy a put option which gives you the right to SELL shares of stock at the selected strike price.
» Call buying is a bullish strategy. Profits are achieved if the stock is trading above the Break Even point.
» Put buying is a bearish strategy. Profits are achieved if the stock is trading below the Break Even point.
» The max risk is equal to the premium paid (debit). Profits are theoretically infinite.
» These are speculative strategies. You can benefit from stock movement without owning shares of stock. Owning calls can protect short stock positions. Owning puts can protect long stock positions.

Call buying and Put buying (Long Calls and Puts) are considered to be speculative strategies by most investors. In a long strategy, an investor will pay a premium to purchase a contract giving them the right to buy stock at a set strike price (Call) or to 'Put' the stock to someone (put). The investor needs the underlying security to move in the desired direction in order to gain a profit.

Advantages with Long Options
Long Call Strategies - Long Put Strategies Potential Profits can be infinite.
How to Invest in Long Calls and Puts Long Option positions are highly leveraged. Investors can control shares of a security for about 10% of the securities value.
The maximum risk of long calls and puts is the cost of the option. i.e. The amount you paid to buy it.
Disadvantages with Long Options:
Long Call Strategies - Long Put Strategies Long Options positions offer no downside protection, as one might have with a Covered Call trade, even though the maximum risk is low.
How to Invest in Long Calls and Puts Long Options are a depreciating asset. The value will always decrease as the expiration date is approached.
Timing when entering a Long Option trade is critical as time is always working against the investor in this strategy.
How to Invest in Long Calls and Puts

Long Call Profit Loss Graph

Call Buying (Long Calls):

This is a bullish to extremely bullish strategy. in a Long Call position, the investor expects the stock to rise. As the underlying security increases, the value of the Call will increase as well. Purchasing a Call gives the investor the right to buy shares of stock at a set price (strike price). A Call option investor is looking to take advantage of the stock movement without investing a large amount of capital to own the stock.

Summary of the Long Call Strategy
  1. Buy a Call only when you are extremely bullish on the stock, index, or market in general.
  2. Select a candidate whose underlying stock is in an up-trend or has a recent BUY signal.
  3. Investors may look to buy a Call 3 or more months out in time to give the stock time to move in the desired direction.
  4. Conservative investors may buy an ITM (strike below the stock price) or ATM Call, speculative investors may buy OTM (strike above the stock price) hoping for a large return.
  5. Profits are theoretically unlimited as the stock could go up infinitely.
Example: Stock XYZ at $40.52
Buy 3 month out (80 days out) 40-strike Call for $1.95.
Break Even at expiration = Strike + Ask price = $40 + $1.95 = $41.95.
Maximum Risk = Premium Paid = $1.95.
There are no return calculations for this strategy. Since there is no income received at the time of trade, a return on the investment can not be calculated until the position is closed. The return value is dependent on the stock price at expiration. The return calculation at expiration would be: [(Closing Stock Price - Call Strike) - Initial Ask Price] ÷ Initial Ask Price.


Long Call Strategies - Long Put Strategies

Long Put Profit Loss Graph

Put Buying (Long Puts):

Buying puts strategy is a bearish to extremely bearish strategy. In a Long Put position, the investor expects the stock to drop. As the underlying security declines, the Put will increase in value. Put buying gives the investor the right to sell shares of stock (put the stock to someone) at a set price (strike price). A Put option investor is looking to take advantage of a stock decline without worrying about margin requirements involved with shorting the stock.

Summary of the Long Put Strategy
  1. Buy a Put only when you are extremely bearish on the stock, index, or market in general.
  2. Buy a Put if you are looking to protect shares of stock you have purchased (Protective Put Strategy).
  3. Select a candidate whose underlying stock is in a downtrend or has a recent SELL signal.
  4. Investors may look to buy a Put 3 or more months out in time to give the stock time to move in the desired direction.
  5. Conservative investors may buy an ITM (strike above the stock price) or ATM Put, speculative investors may buy OTM (strike below the stock price) hoping for a large return.
  6. Profits are relatively unlimited, but the stock can only drop to $0.00 giving the Long Put its maximum value.
Example: Stock XYZ at $39.80
Buy 3 month out (80 days out) 40-strike Put for $1.50.
Break Even at expiration = Strike Price - Ask Price = $40 - $1.50 = $38.50.
Maximum Risk = Premium Paid = $1.50.

There are no return calculations for this long calls and puts strategy. Since there is no income received at the time of trade, a return on the investment can not be calculated until the position is closed. The return value is dependent on the stock price at expiration. The return calculation at expiration would be: [(Put Strike - Closing Stock Price) - Initial Ask Price] ÷ Initial Ask Price.

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Long Call Strategies - Long Put Strategies - How to Invest in Long Calls and Puts
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