6 Popular Options Strategies that Will Keep You in the Money
A stock option that’s “in the money” refers to an option that’s worth exercising. For a call option, it’s a contract where the strike price is below the market price of the underlying stock. For a put option, it’s when the strike price is above the market price of the stock. While “in the money” options may be profitable, they aren’t always.
That’s because it costs money to buy the options contract. You may have spent $1,000 obtaining the rights to buy or sell a stock but, if you can’t recover at least $1,000 in profits, it’s not a winning trade. Here’s how to stay in the money with your strategies and eek out a profit before the closing bell.
Use Married Puts
Married puts are primarily used when you want to take a defensive position on a stock. It creates a sort of “insurance policy” by capping your losses. What you do is purchase a put option on assets that you already own or are about to buy. The option should control the same number of shares that you own. For example, if you own 10,000 shares in a company, your option should give you the right to sell 10,000 shares in that company also.
If the share price falls, you can always exercise the option (or sell it) to prevent your losses from being realized since you will have the right to sell those shares for a pre-set, fixed, price. That’s your “insurance policy”. However, you’re really hoping for the stock price to rise because the options contracts are typically short-term (i.e. 3 months).
Some traders look at this strategy as an overly-defensive one. Why bother investing in a stock if you have doubts about it. For conservative investors, it’s not so much that they believe the stock will tank, it’s about the uncertainty over investing as an activity. You could buy into a wildly popular stock, like Apple, only to find out that its CEO genius dies a few months into your purchase.
This happened to many Apple stockholders when Steve Jobs died. The share price suffered. Those with married puts didn’t take a hit, and didn’t have to wait for the stock to recover.
Fly With the Iron Condor
You’ll want a decent broker for this one – try hunting one down using BrokerStance or a similar service. The iron condor is a well-known stock option trading strategy, but one that can clip your wings pretty quickly if you’re not careful. You, as the investor, hold both a long and short position in two different strangle strategies. While common, it’s also a very complex strategy that requires a lot of time to learn (correctly) and patience. Expect to lose money the first couple of times to try it.
If you try this strategy, stick to index options. They provide the type of volatility necessary to make a nice profit, and they don’t have so much volatility that they wipe you out before you can profit from the strategy. True iron condors typically have an 80 percent probability of success, but the losses on that 20 percent are also often significantly higher than your potential gain.
Use this strategy when you think the market will trade within a specific range (which is very common). An overly volatile market that slides too far in either direction will be the death of you. Never, ever, take a full loss with this strategy.
The Iron Butterfly Effect
The iron butterfly consists of combining either a long or a short straddle with the purchase or sale of a strangle. It uses both calls and puts to pull out the profits and profit and loss are both limited within a known range before you ever start placing trades. Typically, investors use “out of the money” options to cut costs and limit risks.
Cover Your Calls
A covered call is where you purchase both an asset and a call option on that asset – the shares of stock you purchase cover your stock option. When you have a short-term position and a neutral opinion about the stock you own, use a covered call. This strategy is designed to generate additional income through the call premium. It also works with puts, called “covered puts.”
Call Out the Bull
A bull call spread requires that you simultaneously buy call options at a specific strike price while selling the same number of calls at a higher price. Both calls have the same expiration date and same underlying stock. Use this when you’re bullish on the underlying asset and expect at least a moderate increase in the stock’s price within 3 to 6 months (or however long you purchase the option for).
Put the Bear Down
A bear put spread requires that you simultaneously buy put options at a specific strike price and sell the same number of puts at a lower price. As with the call spread, the put spread requires your assets to have the same expiration month. Opposite the call spread, with this strategy, you’re expecting the underlying stock to decline in price and you want to profit from it.
Jarryd Harden is constantly hunting for the best trading techniques. He enjoys sharing his findings online.
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