Investment Education

If you write a put on a stock and keep enough cash in your account to cover your maximum risk, you create a position known a “cash-covered put write.” There is no margin requirement on the cash-covered put and the position’s gain and loss profile is almost identical to the corresponding covered call (same stock, strike, and expiration). In this week’s report, using put and call examples from Bio-Rad Labs (BIO), we show you how these two strategies are basically equivalent.  We also discuss when cash-covered puts might be preferable to covered calls.

This week, we review what are known as the put/call parity rules. If you know one rule - and you remember your high school algebra - you can quickly master all the rules. Mastery of these rules gives you a lot more flexibility when planning your option strategies.

Often, when markets are panicked, lower strike short-term premiums are overpriced, while longer-term higher strike premiums are relatively cheap. The diagonal backspread offers you a way to take advantage of such a situation if you think that the stocks are likely to recover.

This spread, which can often be established with little or no outlay of cash, and can offer you a way to participate in a rapidly rising stock with little downside risk.

These spreads consist of a longer-term option purchase (often a Leap) and a nearer-term option sale at a different strike price. These spreads can be very attractive alternatives to covered calls.

A typical calendar spread is the sale of a shorter-term option and the purchase of a longer-term one. These spreads often offer the average investor the chance to sell overpriced short-term premium with relatively little risk.

This particular hedge is attractive in times such as these when the demand for nominally cheap insurance is driving up the price of the lower strike puts.

Most people know that you can hedge a stock by buying a put or by writing a call on it. What is no so well known is that you can do both. This long stock + short + long put combination is known as a collar. 

 These positions consist of owning the stock and buying a put to protect it. Not only are you insuring against losses, you are insuring against opportunity losses as well. Often this insurance is a lot cheaper than you think.

Delta, Gamma, Theta, Vega & Rho - Although these terms sound complicated, they are easy to understand once you grasp a few basic concepts. Mastering them tells you why options behave the way they do under different scenarios.