Most people view trading options as a very risky, highly leveraged play, and one that should be avoided by most people. There are actually some very conservative option strategies that can be even lower risk than owning a common blue chip stock. Allow me to explain…
Selling Puts On Stocks You Want To Own
This is one of my favorite strategies. If you know there is a stock that you want to own, but don’t want to pay the price for which it is currently trading, you can sell a put option on the stock. By selling a put, you can collect a premium (cash) while you want for a better price. If the stock drops and hits the price that you are obligated to buy it at, you will be forced to buy the stock and you get to keep the premium. If the stock stays above the agreed upon strike price, then you keep the premium and nothing happens.
Selling puts is a great way to earn a return while you wait for a better price. You need to have the cash in your account ready in case you are forced to buy the number of shares at the strike price.
Writing Covered Calls On Stocks You Already Own
This is a great way to protect against some downside on the stocks you own. You also are able to earn some extra money on top of the dividends of your stock that you write a call for. By writing a call on a stock you own, you will be paid a premium (cash) in exchange for agreeing to sell your stock if it rises and hits the strike price. If the stock stays below the strike price, you keep the premium and nothing happens. So, the only thing you’re risking is additional potential upside above and beyond the strike price.
Both of these strategies are very conservative plays, however, you should make sure you fully understand them prior to executing either strategy. Options can be confusing if you’ve never traded them, so read up on them thoroughly using one of the countless resources across the internet. Lastly, you can always call your broker and ask them to help you execute the necessary trade.
Remember, all stocks and options have risk and can lead to losing money. Exercise caution.
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