Covered Straddle

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A short put spread obligates you to buy the stock at strike price B if the option is assigned but gives you the right to sell stock at strike price A. A short put spread is an alternative to the short put. One advantage of this strategy is that you want both options to expire worthless.

You may wish to consider ensuring that strike B is around one standard deviation out-of-the-money at initiation. That will increase your probability of success. However, the further out-of-the-money the strike price is, the lower the net credit received will be from this spread.

As a general rule of thumb, you may wish to consider running this strategy approximately days from expiration to take advantage of accelerating time decay as expiration approaches. Of course, this depends on the underlying stock and market conditions such as implied volatility. You may also be anticipating neutral activity if strike B is out-of-the-money. You want the stock to be at or above strike B at expiration, so both options will expire worthless.

The net credit received when establishing the short put spread may be applied to the initial margin requirement. Keep in mind this requirement is on a per-unit basis. For this strategy, the net effect of buy call and sell put option strategy decay is somewhat positive. It will erode the value of the option you sold good but it will also erode the value of the option you bought bad.

After the strategy is established, the effect of implied volatility depends on where the stock is relative to your strike prices. If your forecast was correct and the stock price is approaching or above strike B, you want implied volatility to decrease.

If your forecast was incorrect and the stock price is approaching or below strike A, you want implied volatility to increase for two reasons. First, it will increase the value of the near-the-money option you bought faster than the in-the-money option you sold, thereby decreasing buy call and sell put option strategy overall value of the spread. Second, it reflects an increased probability of a price swing which will hopefully be to the upside. Options involve risk and are not suitable for all investors.

For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risksand may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point.

The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct.

Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations buy call and sell put option strategy offer investment, financial, legal or tax advice. System response and access times may vary due to market conditions, system performance, and other factors.

Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy call and sell put option strategy or sell a particular security or to engage in any particular investment strategy. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results.

All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between.

The Strategy A short put spread obligates you to buy the stock at strike price B if the option is assigned but gives you the right to sell stock at strike price A. Options Guy's Tips One advantage of this strategy is that you want both options to expire worthless. Both options have the same expiration month. When to Run It You're bullish. Break-even at Expiration Strike B minus the net credit received when selling the spread.

The Sweet Spot You want the buy call and sell put option strategy to be at or above strike B at expiration, so both options will expire worthless. Maximum Potential Profit Potential profit is limited to the net credit you receive when you set up the strategy. Maximum Potential Loss Risk is limited to the difference between strike A and strike B, minus the net credit received.

Ally Invest Margin Requirement Margin requirement is the difference between the strike prices. As Time Goes By For this strategy, the net effect of time decay is somewhat positive. Implied Volatility After the strategy is established, the effect of implied volatility depends on where the stock is relative to your strike prices.

Use the Technical Analysis Tool to look for bullish indicators. Use the Probability Calculator to verify that buy call and sell put option strategy B is about one standard deviation buy call and sell put option strategy.

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Calls may be used as an alternative to buying stock outright. You can profit if the stock rises, without taking on all of the downside risk that would result from owning the stock. It is also possible to gain leverage over a greater number of shares than you could afford to buy outright because calls are always less expensive than the stock itself.

But be careful, especially with short-term out-of-the-money calls. If you buy too many option contracts, you are actually increasing your risk. Options may expire worthless and you can lose your entire investment, whereas if you own the stock it will usually still be worth something. Except for certain banking stocks that shall remain nameless. A general rule of thumb is this: You can learn more about delta in Meet the Greeks. Try looking for a delta of. In-the-money options are more expensive because they have intrinsic value, but you get what you pay for.

Many rookies begin trading options by purchasing out-of-the-money short-term calls. For this strategy, time decay is the enemy. It will negatively affect the value of the option you bought. After the strategy is established, you want implied volatility to increase. Options involve risk and are not suitable for all investors.

For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risks , and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point.

The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice.

System response and access times may vary due to market conditions, system performance, and other factors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.

The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns.

The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between. The Strategy A long call gives you the right to buy the underlying stock at strike price A. Maximum Potential Loss Risk is limited to the premium paid for the call option. Ally Invest Margin Requirement After the trade is paid for, no additional margin is required. As Time Goes By For this strategy, time decay is the enemy. Implied Volatility After the strategy is established, you want implied volatility to increase.

Use the Technical Analysis Tool to look for bullish indicators. Break-even at Expiration Strike A plus the cost of the call. The Sweet Spot The stock goes through the roof.