Go to http://ExpertOptionTrading.com/videos for more free videos on Options Intrinsic Value
Hello, tradeologists. We left off Part 1 with talking about covered stock. That is the purchase of stock with a put option for insurance, in case the stock doesn't go in the direction you would go in, which is up.
Let me explain to you that it doesn't matter whether the stock goes up or down. We try to avoid the hassle of it going down. We would rather have it go up. Yes, the insurance is a cost, and it does cost us money to put on that insurance, but it's well worth the cost. I think you would agree. If you're buying 1000 shares, even if you're only buying 100 shares, that one put option on your position does let you sleep at night. It gives you some comfort, in knowing that if the stock does decline in price, or open up dramatically lower the very next day after you bought it - and it's happened before. It's happened to me.
You won't lose a lot of money. I put a cap on the amount of money I want to lose upon initiating the position. At that point, either I cash in my insurance policy to buy more shares. Or, what I do is, if the stock goes up, I'm in a happy situation, and I roll those puts up as the stock increases in price, so I'm protected at higher levels.
I may not set it as close. I may not set that put as close. If I bought the stock at $18, and I put a $18 put on there, at the strike price of $18, if it rolls up to $19 or $20, I might only roll that put up to the $19 level, instead of the $20 level. I have a built-in profit, at that point. I'm always rolling up my puts underneath the stock price, so that I have that additional protection, as the stock increases in price.
At some point, that stock may decline again. I certainly want to be able to use that put as insurance, to cash in and buy some additional stock, at that point, and continue with the trade.
That's the real benefit. Here's a good question: What happens if the stock doesn't do anything at all? Let's say you purchased it here, at $17.50. Let's go back to our Starbucks chart again. You purchased the stock at $17.50, and it meanders and doesn't do anything. About a month later, you're still at $17.50.
I'll pay one month of insurance on a stock, and if it doesn't pay off, or the stock doesn't move, then I don't really want to hold that stock anymore. I will go into something that's a little more active. I will only hold a position like this - let's say I bought this at $18 now, and I put an $18 put on as insurance. I'll hold that for a month. If I have to go back in, and the stock has not moved, and it's still at $18, and I have my $18 put, it's going to expire worthless.
At that point, I'm going to call it a day and say, "Hey, you know what? This stock isn't going to move." Unless something happens in the stock beforehand - unless I think it's about to make a dramatic move upward, I may stay with the stock a little bit longer. Generally, I'll give it a month to move. If it doesn't move either up or down, then I want to look for other opportunities, free up my capital, and put it into something a little bit more opportunistic, with a little bit more potential.
Also, there are other strategies that you can take advantage of.
For more videos on Options Intrinsic Value be sure to check out our channel:
To learn more about the Expert Option Trading course go to:
vertical spreads, options greeks, what is options trading, option volatility, option spreads, options volatility, how to trade in options, option strategies, index options, equity options, virtual trading, options spreads, virtual options trading, options trading tutorial, option trading strategy, options trading course, how to trade stock options, options trading systems, options training, learning options, learn to trade options, option trading tutorial, options trading strategy, option trading course, option trading systems, options trading basics, option trading basics, option trading system, options trading courses, options trading training, trade options, what is a stock option, options strategies