Educational Strategy Reprints

Introduction

Welcome to the Educational Reprints from The Value Line Option Strategist. We have posted these reprints to help you use options as an investment tool and to introduce you to The Value Line Daily Options Survey.

1. Understanding Time Premium. What is an option and what gives it value? Here we show you why options are insurance against financial uncertainty and why this insurance is often a lot cheaper than most people think.
2. Buying Naked Calls. This report shows you how buying calls is really insurance against (1) losing money if the stock falls and (2) missing out if the stock rises. According to our models (and our track record), this insurance is well worth buying.
3. Buying Naked Puts. This report shows you how you can diversify your investments by buying "naked" puts. These puts can be in-, at- or out-of-the-money. Our model picks underpriced puts on stocks that Value Line expects to underperform the market. Our track record shows that even a small allocation to naked put buying can greatly improve your returns over time.
4. Covered Calls: Doing the Math. You write covered calls when the call is overpriced compared to how much you expect the stock to move. In this report, we show you some very useful calculations to help you make your covered call selections.
5. Managing a Covered Call Portfolio. Managing a covered call portfolio is more complicated to manage than a stock portfolio. However, a few simple calculations and some basic guidelines can make the task a whole lot simpler. Here, we show you how to decide when to hold, when to roll and when to close position out entirely.
6. Writing Cash Covered Puts: an Alternative to Covered Call Writing. This report shows how put writes and covered calls have very similar gains and losses and how fully collateralized put writes can be preferable a lot of the time.
7. Option Spreads I: Basic Bull and Bear Spreads. Knowing a few basics can save you a lot of time in figuring out spreads. This report gives you the tools to trade spreads with confidence.
8. Option Spreads II: Credit Spreads as "Naked" Write Alternatives. Writing "naked" options can be very profitable, but is also very risky. Did you know that often a credit spread based on a certain option can require less margin and give you better returns than a "naked" write. Here are examples of how to look for these opportunities.
9. A Primer on Put/Call Parity. When you net in interest and dividends, a call and a put (same stock, strike and expiration) have the same time premium. It is easy to master the put/call parity rules. Knowing them will help you chose the right option strategy under any set of circumstances.
10. Capital Efficient Covered Call Alternatives Some of these alternatives require only about 1/3 as much capital as the corresponding covered calls. They thus allow the investor much greater scope for diversification.
11. Meet the "Greeks" 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.
12. Hedging Stocks with Protective Puts 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.
13. Hedging Stocks with Collars 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.
14. Hedging with Bear Spreads 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.
15. Options Spreads III - Calendar Spreads 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.
16. Options Spreads IV - Long Diagonal Spreads. 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.
17. Options Spreads V - The Backspread 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.
18. Option Spreads VI - The Diagonal Backspread. 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.

Prepared by Lawrence D. Cavanagh,
Managing Editor/Senior Analyst