Zero Risk Strategy
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Capital preservation and minimizing losses should be the most important objectives of any investor or trader. Warren Buffett is credited with the saying: Oftentimes, investors are drawn to options because they think of them as a way to limit risk while still offering huge potential profits.
This is true in theory, but the reality is a different story. An option is a wasting asset. It has a limited lifespan, and every day that it draws closer to expiration, its value erodes as the chances of it being profitable diminish. This is known as time decay. There are two types of options, and you can be a buyer or seller of either: A call option gives the buyer the right but not the obligation to buy shares of the underlying stock at an agreed upon price the option's strike price within a certain period of time.
The seller of a call option also known as the writer sells the right to the buyer for a payment known as a premium. In doing so, the seller assumes no loss option trading strategy obligation to deliver the shares at the strike price should the buyer choose to exercise her or his right. The call buyer will do so if the market price is higher than the option's strike price.
A put option gives the buyer the right but not the obligation to sell shares of the underlying stock at the option's strike price within a certain period of time. The put seller receives a premium and assumes the obligation to purchase the shares at the option's strike price should the buyer choose to exercise her no loss option trading strategy his right.
No loss option trading strategy put buyer will do so if the market price is lower than the option's strike price. Generally speaking, only the first outcome will make the call buyer a profit, and only the fifth outcome will make the put no loss option trading strategy a profit.
But four of the five outcomes benefit the option seller. For example, as a put seller, we will profit as long as the no loss option trading strategy goes up a little or a lottrades sideways, or falls, as long as it does not drop below your cost basis strike price minus premium.
However, the stock could go as low as zero. That can open up put sellers to potential losses since they will be obligated to buy the stock at the strike price regardless of how far below it shares trade. A credit spread is created by simultaneously buying and selling two different options on the same underlying stock or ETF where no loss option trading strategy value of the short option the one sold is greater than the value of the long option the one boughtgenerating a net credit.
These options have different strike prices but the same expiration date. Let's look at a hypothetical no loss option trading strategy of a credit put spread, also known as a bull put spread or a vertical spread. To initiate a bull put spread you would sell a put option and simultaneously purchase another put option on the same underlying asset with the same expiration date but a lower strike price.
For a credit call spread, or bear call spread, you would sell a call and simultaneously buy a call with a higher strike price. This is the maximum profit on the trade. We can close this spread by buying the short option and selling the long option to either take a smaller gain or a smaller loss depending on the value of the spread at any time.
Due to the defined loss potential, the margin required is the width of the spread, and it will never go up due to adverse stock movement. With a naked put, the initial margin required can be larger and could become even larger with adverse movement in the price of the stock. Action to Take -- In summary, with a bull put spread we can be net option sellers and benefit from four out of five possible outcomes. The potential no loss option trading strategy will be smaller with a bull put spread than with a naked put, but risk is also decreased.
Click here to get the free trading advisory -- Trade of the Week. I would agree totally with the above. While I tend to focus more on Binary Options, no matter what you trade, money management is vital. I think the level of gains made using the Bull Put Spread is only secondary to the fact that gains are made. By approaching this with lower expectations of gains you actually decrease risk.
This imo is the number one factor that needs to be considered when trading.