these are covered as well.■
x.y.3
Risk Profile
This section provides, where possible, simple calculations for you to evaluatethe risk, reward, and breakeven points for each strategy.■
x.y.4
Greeks
This is where we graphically explain each of the “Greeks.” The Greeks aresimply sensitivities of options to various factors, such as price movement,time decay, volatility, and interest rates. The Greeks are as follows:Delta:The movement of the option position relative to the movement of the underlying (say, stock) position. The resulting figure gives us an indication of thespeed at which the option position is moving relative to the underlying stockposition. Therefore, a Delta of 1 means the option position is moving 1 pointfor every point the stock moves. A Delta of –1 means the option position ismoving –1 point for every point the underlying stock moves.
Preface
xxxvii
Typically, at-the-money options move with a Delta of 0.5 for calls and –0.5for puts, meaning that ATM options move half a point for every 1 point thatthe underlying asset moves. This does not mean the option leg is movingslower in percentage terms, just in terms of dollar for dollar.Delta is another way of expressing the probability of an option expiringin-the-money. This makes sense because an ATM call option has a Delta of0.5; i.e., 50%, meaning a 50% chance of expiring ITM. A deep ITM call willhave a Delta of near 1, or 100%, meaning a near 100% chance of expirationITM. A very out-of-the-money call option will have a Delta of close to zero,meaning a near zero chance of expiring ITM.So, Delta can be interpreted both in terms of the speed of the position andthe probability of an option expiring ITM. Some advanced traders like totrade with the sum of their portfolio Delta at zero, otherwise known as DeltaNeutral trading. This is by no means a risk-free method of trading, but it is astyle that enables profits to be taken regardless of the direction of marketmovement. However, this is only really suited to professional-style traderswho have the very best technology solutions and a lot of experience.Gamma:Gamma is mathematically the second derivative of Delta and can be viewedin two ways: either as the acceleration of the option position relative to theunderlying stock price, or as the odds of a change in probability of the position expiring ITM (in other words, the odds of a change in Delta). Gamma iseffectively an early warning to the fact that Delta could be about to change.Both calls and puts have positive Gammas. Typically, deep OTM and deepITM options have near zero Gamma because the odds of a change in Delta arevery low. Logically, Gamma tends to peak around the strike price.Theta:Theta stands for the option position’s sensitivity to time decay. Long options(i.e., options that you have bought) have negative Theta, meaning that everyday you own that option, time decay is eroding the Time Value portion of theoption’s value. In other words, time decay is hurting the position of an optionholder. When you short options, Theta is positive, indicating that time decayis helping the option writer’s position.Vega:Vega stands for the option position’s sensitivity to volatility. Options tend toincrease in value when the underlying stock’s volatility increases. So, volatility helps the owner of an option and hurts the writer of an option. Vega is positive for long option positions and negative for short option positions.Rho:Rho stands for the option position’s sensitivity to interest rates. A positive Rhomeans that higher interest rates are helping the position, and a negative Rho
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Preface
means that higher interest rates are hurting the position. Rho is the leastimportant of all the Greeks as far as stock options are concerned.■
x.y.5
Advantages and Disadvantages
As indicated, this section highlights the strengths and weaknesses of thestrategy in question and the context of suitability for the trader.■
x.y.6
Exiting the Trade
This module indicates the steps required to exit the position or to mitigate a loss.■
x.y.7
Example
Every strategy ends with an illustrated example. The examples are all takenfrom real stocks using real data. However, because they are intended to beobjectively indicative of how the strategies work, I have renamed the stock“ABCD” for every example. This helps us keep our minds focused on thestructure of the strategy and avoid any preconceived prejudices against theactual stocks that were selected.
Tables of ContentsWith so many strategies to choose from, it’s crucial that you don’t get lost! The multitables of contents are designed so that you can find the appropriate strategy easily,without having to thumb your way through the entire book to get there first.Familiarize yourself with this area because it’s going to save you a lot of time as youuse it later on. In print, we’re restricted to two dimensions, but on the web site, youcan use the Strategy Matrix completely interactively.
General CommentsWithin the strategy modules, there are references to concepts and definitions thatyou’ll be able to find in the Glossary. For example, “Trading Plan” is referred tothroughout the guides and is defined in the Glossary.As options traders, we should definitely acquaint ourselves with the concepts offundamental and technical analysis. Fundamental analysis involves the interpretation of how economies, sectors, and individual corporations are performing in termsof assets, liabilities, revenues, and profits.Technical analysis involves the interpretation of price charts for securities. Wereally should understand the basic chart patterns such as pennants, flags, head andshoulders, support, resistance, and Fibonacci retracements. Remember, an option isa derivative—it is derived from an underlying security. Therefore, it makes sense for usto understand how that underlying security is likely to move and why.I hope you enjoy this reference book and use it for many years to come. By allmeans, read it from cover to cover, but you’ll probably get the best value by dippingin whenever the need arises.Good luck.Guy Cohen
Acknowledgments
I want to take this opportunity to express my gratitude to my colleagues atOptionEasy, particularly Paul Doidge, whose diligence and ability are phenomenal.Again, thanks to Geoffrey Glassborow for being such a great mentor, andDominic and Lulu for being like family.Finally, a big thank you to those students who have attended my workshops. Youcannot imagine how much I’ve learned from you.
About the Author
Guy Cohen BSc ARIC MBA, is developer of OptionEasy, the world’s most comprehensive and user-friendly online options trading and training application. Asuccessful private investor and trader, Guy has developed a global reputation forteaching technical analysis, options strategies, and trading psychology.Guy is author of the global bestseller Options Made Easy, the definitive plainEnglish guide to options trading for private investors. He holds an MBA in financefrom City University (Cass) Business School, London, UK.For more information, go to www.optioneasy.com.For all inquiries, write to enquiries@optioneasy.com.
1The Four Basic OptionsStrategiesIntroductionThe easiest way to learn options is with pictures so that you can begin to piecetogether strategies step-by-step. However, first we need to understand the fourbasic strategies. From that point, logic kicks in, and our learning can progressexponentially.A risk profile chart shows us our profit/loss position for each trade. It differs froma standard price/time chart that we’re used to seeing to monitor stock prices.There are four easy steps to creating a risk profile chart:Step 1: Y axis for profit/loss position
+25Profit +
0
Loss –25
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The Bible of Options Strategies
Step 2: X axis for underlying asset price range+25Profit +
0
Loss –250
25
50
Asset Price ($)
Step 3: Breakeven line+25Profit +
Breakeven
0
Loss -2525Asset Price ($)
0
50
Step 4: Risk Profile line+25Profit +Stock Purchase PriceBreakeven
0
Loss –250
25Asset Price ($)
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The Four Basic Options Strategies
This chart shows our risk profile for a long stock position. As the asset price risesabove our purchase price (along the x-axis), we move into profit. Our risk is cappedto what we paid, as is our breakeven point, and our potential reward is uncapped.The reverse position is when we short a stock, in which case the opposite occurs.Here, as the stock price rises above our short price, our short position shows a loss,which can be unlimited as the stock continues to rise. Our risk is uncapped as thestock rises, and our potential reward is the price we shorted at, as is our breakevenpoint.
Profit +Stock Short Price0
Loss 0
Asset Price ($)
Now that we know how to interpret a risk profile chart, we can proceed withanalyzing each strategy.The four basic strategies that underpin your entire options trading knowledge are:■
Long Call
■
Short Call
■
Long Put
■
Short Put
We should already know that owning an option exposes us to time decay, so typically we like to own options with expiration dates that are reasonably far away togive us a chance of our option increasing in value.With options, we have the “Rule of the Opposites,” where if one thing isn’t true,then the opposite must be true. Therefore, if time decay hurts us when we buyoptions, it must help us when we sell options. Because time value decreases (or timedecay increases) exponentially during the last month to expiration, we typicallydon’t like to own options into that last month, but we do like to sell options with onemonth left to expiration.With these four strategies, we would buy calls and puts with at least threemonths (or more) left to expiration, thereby looking for the options to increase invalue during that time.We would short calls and puts with a month or less to expiration, thereby looking for short-term income as the option hopefully expires worthless.
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The Four Basic Options Risk ProfilesImagine that the dotted lines are mirrors and see how each strategy is the oppositeof the one on the other side of the mirror.
Buying a Call
Buying a Put
■■■
■■■
Belief that stock will rise (bullish outlook)Risk limited to premium paidUnlimited maximum reward
Belief that stock will fall (bearish outlook)Risk limited to premium paidUnlimited maximum reward up to the strikeprice less the premium paid
Writing a Call
Writing a Put
■■
■■
■■
Belief that stock will fall (bearish outlook)Maximum reward limited to premiumreceivedRisk potentially unlimited (as stock pricerises)Can be combined with another position tolimit the risk
■■
Belief that stock will rise (bullish outlook)Risk “unlimited” to a maximum equating tothe strike price less the premium receivedMaximum reward limited to the premiumreceivedCan be combined with another position tolimit the risk
The Four Basic Options Strategies
1.1 Long CallProficiency
Direction
Volatility
Asset Legs
N/ANovice
Bullish
Max Risk
Max Reward
Strategy Type
Uncapped
Capital Gain
!
Long Call
Capped
1.1.1 DescriptionBuying a call is the most basic of all option strategies. For many people, it constitutestheir first options trade after gaining experience buying and selling stocks.Calls are easy to understand. A call is an option to buy, so it stands to reason thatwhen you buy a call, you’re hoping that the underlying share price will rise.ITM
In the Money
stock  call strike price
ATM
At the Money
stock  call strike price
OTM
Out of the Money
stock  call strike price
Buy call
Steps to Trading a Long Call1. Buy the call option.■
Remember that for option contracts in the U.S., one contract is for 100shares. So when you see a price of $1.00 for a call, you will have to pay$100 for one contract.
■
For S&P Futures options, one contract is exercisable into one futures contract. If the option price is $1.00, you will pay $250 for one futures contractupon exercise.
Steps In■
Try to ensure that the trend is upward and identify a clear area of support.
Steps Out■
Manage your position according to the rules defined in your Trading Plan.
■
Sell your long options before the final month before expiration if you wantto avoid the effects of time decay.
■
If the stock falls below your stop loss, then exit by selling the calls.
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The Bible of Options Strategies
1.1.2 ContextOutlook■
With a Long Call, your outlook is bullish. You expect a rise in the underlyingasset price.
Rationale■
To make a better return than if you had simply bought the stock itself. Doensure that you give yourself enough time to be right; this means you shouldgo at least six months out, if not one- or two-year LEAPs. If you think these areexpensive, then simply divide the price by the number of months left to expiration and then compare that to shorter-term option prices. You will see thatLEAPs and longer-term options are far better value on a per month basis, andthey give you more time to be right, thus improving your chances of success.Another method is to buy only shorter-term deep ITM options.
Net Position■
This is a net debit transaction because you pay for the call option.
■
Your maximum risk is capped to the price you pay for the call.
■
Your maximum reward is uncapped.
Effect of Time Decay■
Time decay works against your bought option, so give yourself plenty of timeto be right.
■
Don’t be fooled by the false economy that shorter options are cheaper.Compare a one-month option to a 12-month option and divide the longeroption price by 12. You will see that you are paying far less per month for the12-month option.
Appropriate Time Period to Trade■
At least three months, preferably longer, depending on the particular circumstances.
Selecting the Stock■
Choose from stocks with adequate liquidity, preferably over 500,000 AverageDaily Volume (ADV).
■
Try to ensure that the trend is upward and identify a clear area of support.
The Four Basic Options Strategies
Selecting the Option■
Choose options with adequate liquidity; open interest should be at least 100,preferably 500.
■
Strike—Look for either the ATM or ITM (lower) strike below the current stock.
■
Expiration—Give yourself enough time to be right; remember that time decayaccelerates exponentially in the last month before expiration, so give yourself aminimum of three months to be right, knowing you’ll never hold into the lastmonth. That gives you at least two months before you’ll need to sell. Longerwould be better, though.
1.1.3 Risk Profile■
Maximum Risk
[Call premium]
■
Maximum Reward
[Uncapped]
■
Breakeven
[Call strike  call premium]
1.1.4 GreeksKey:ExpirationToday – 6 monthsTime(t) – 1 monthRisk ProfileAs the stock pricerises, the long callmoves into profitmore and morequickly, particularlywhen the stock priceis greater than thestrike price.DeltaDelta (speed) is positive and increases atits fastest rate aroundthe strike price, untilit reaches 1. Noticehow Delta is zerowhen the option isdeep OTM.GammaGamma (acceleration)is always positive witha long call, and itpeaks when Delta isat its fastest (steepest) rate.
Risk Profile
Theta
ThetaTheta is negative,illustrating that timedecay hurts the longcall position.
Delta
Vega
VegaVega is positive, illustrating that volatilityis helpful to the position because highervolatility translatesinto higher optionvalues.
Gamma
Rho
RhoRho is positive, illustrating that higherinterest rates wouldincrease the valueof the calls andtherefore help theposition.
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The Bible of Options Strategies
1.1.5 Advantages and DisadvantagesAdvantages■
Cheaper than buying the stock outright.
■
Far greater leverage than simply owning the stock.
■
Uncapped profit potential with capped risk.
Disadvantages■
Potential 100% loss if the strike price, expiration dates, and stock are badlychosen.
■
High leverage can be dangerous if the stock price moves against you.
1.1.6 Exiting the TradeExiting the Position■
Sell the calls you bought!
Mitigating a Loss■
Use the underlying asset or stock to determine where your stop loss should beplaced.
1.1.7 ExampleABCD is trading at $28.88 on February 19, 2004.Buy the January 2005 $27.50 strike call for $4.38.
You Pay
Call premium$4.38
Maximum Risk
Call premium$4.38Maximum risk is 100% of our total cost here
Maximum Reward
Unlimited as the stock price rises
Breakeven
Strike price  call premium$27.50  $4.38  $31.88
The Four Basic Options Strategies
1.2 Short (Naked) CallProficiency
Direction
Volatility
Asset Legs
Max Risk
Max Reward
Strategy Type
Short Call
Uncapped
Capped
Income
N/AAdvanced
Bearish
1.2.1 DescriptionAlthough simple to execute, shorting a call (without any form of cover) is a riskystrategy, hence its categorization as an advanced strategy. A Short Call exposes us touncapped risk if the stock rises meteorically, and brokers will only allow experienced options traders to trade the strategy in the first place.A call is an option to buy, so it stands to reason that when you buy a call, you’rehoping that the underlying share price will rise. If you’re selling or shorting a call,it’s therefore logical that you’d want the stock to do the opposite—fall.
Sell call
Steps to Trading a Short Call1. Sell the call option with a strike price higher than the current stock price.■
Remember that for option contracts in the U.S., one contract is for 100shares. So when you see a price of $1.00 for a call, you will receive $100 forone contract.
Steps In■
Try to ensure that the trend is downward or rangebound and identify aclear area of resistance.
Steps Out■
Manage your position according to the rules defined in your Trading Plan.
■
Hopefully the stock will decline or remain static, allowing your sold optionto expire worthless so you can keep the entire premium.
■
If the stock rises above your stop loss, then exit the position by buying backthe calls.
■
Time decay will be eroding the value of your call every day, so all otherthings being equal, the call you sold will be declining in value every day,allowing you to buy it back for less than you bought it for, unless theunderlying stock has risen of course.
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1.2.2 ContextOutlook■
Bearish—You are expecting a fall in the stock price; you are certainly notexpecting a rise in the stock.
Rationale■
To pick up short-term premium income as the stock develops price weakness.
Net Position■
This is a net credit transaction because you are receiving a premium for thecall.
■
Your maximum risk is uncapped.
■
Your maximum reward is capped to the price you receive for the call.
Effect of Time Decay■
Time decay is helpful to your naked sold option, so take advantage of the maximum time erosion. Maximum time decay (or theta decay) occurs in the lastmonth before the option’s expiration, so it makes sense to sell one-month orless options only.
■
Don’t be fooled by the false economy that selling longer options would bemore lucrative. Compare a one-month option to a 12-month option and multiply the shorter option price by 12. You will see that you are receiving far moreper month for the one-month option. Also remember that you want the personon the long side of this trade to have as short a time as possible to be right.
■
Give yourself as little time as possible to be wrong because your maximumrisk is uncapped.
Appropriate Time Period to Trade■
One month or less.
Selecting the Stock■
Choose from stocks with adequate liquidity, preferably over 500,000 AverageDaily Volume (ADV).
■
Try to ensure that the trend is downward and identify a clear area ofresistance.
The Four Basic Options Strategies
Selecting the Option■
Choose options with adequate liquidity; open interest should be at least 100,preferably 500.
■
Strike—Look for OTM strikes above the current stock price.
■
Expiration—Give yourself as little time to be wrong. Remember that yourshort position exposes you to uncapped risk, and that time decay acceleratesexponentially (in your favor when you’re short) in the last month before expiration, so only short the option with a maximum of one month to expiration,preferably less.
1.2.3 Risk Profile■
Maximum Risk
[Uncapped]
■
Maximum Reward
[Call premium]
■
Breakeven
[Call strike  call premium]
1.2.4 GreeksRisk ProfileAs the stock pricerises, the short callloses money moreand more quickly,particularly when thestock price is greaterthan the strike price.DeltaDelta (speed) is negative and moves at itsfastest (negative) ratearound the strikeprice, until it reaches-1. Notice how Deltais zero when theoption is deep.GammaGamma (acceleration)is always negativewith a Short Call, andit peaks inverselywhen Delta is at itsfastest (steepest)rate. Gamma is zerowhen the position isdeep OTM or ITM(i.e., when Delta isn’tmoving).
Key:ExpirationToday – 6 monthsTime(t) – 1 monthRisk Profile
Theta
Delta
Vega
Gamma
Rho
ThetaTheta is positive,illustrating that timedecay helps the shortcall position. As anoption seller, this is ofcourse completelylogical.VegaVega is negative, illustrating that volatilityis unhelpful to theposition becausehigher volatility translates into higheroption values. As theseller of option premium, we’d ratherthe option valuedecreases.RhoRho is negative, illustrating that higherinterest rates wouldharm the Short Callposition.
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1.2.5 Advantages and DisadvantagesAdvantages■
If done correctly, you can profit from falling or rangebound stocks in this way.
■
This is another type of income strategy.
Disadvantages■
Uncapped risk potential if the stock rises.
■
A risky strategy that is difficult to recommend on its own.
1.2.6 Exiting the TradeExiting the Position■
Buy back the options you sold or wait for the sold option to expire worthless(if the underlying stock falls and stays below the strike price) so that you cankeep the entire premium.
Mitigating a Loss■
Use the underlying asset or stock to determine where your stop loss should beplaced.
1.2.7 ExampleABCD is trading at $28.20 on February 19, 2004.Sell the March 2004 $30.00 strike call for $0.90.You Receive
Call premium$0.90
Maximum Risk
Uncapped
Maximum Reward
Call premium$0.90
Breakeven
Strike price  call premium$30.00  $0.90  $30.90
1.3 Long PutProficiency
Direction
Volatility
Asset Legs
N/ANovice
Bearish
Max Risk
Max Reward
Strategy Type
Uncapped
Capital Gain
!
Long Put
Capped
The Four Basic Options Strategies
1.3.1 DescriptionBuying a put is the opposite of buying a call. A put is an option to sell. When youbuy a put, your outlook is bearish.ITM
In the Money
stock  put strike price
ATM
At the Money
stock  put strike price
OTM
Out of the Money
stock  put strike price
Buy put
Steps to Trading a Long Put1. Buy the put option.■ Remember that for option contracts in the U.S., one contract is for 100shares. So when you see a price of $1.00 for a put, you will have to pay$100 for one contract.■
For S&P Futures options, one contract is exercisable into one futures contract. If the option price is $1.00, you will pay $250 for one futures contractupon exercise.
Steps In■
Try to ensure that the trend is downward and identify a clear area ofresistance.
Steps Out■
Manage your position according to the rules defined in your Trading Plan.
■
Sell your long options before the final month before expiration if you wantto avoid the effects of time decay.
■
If the stock rises above your stop loss, then exit by selling the puts.
1.3.2 ContextOutlook■
With a Long Put, your outlook is bearish. You expect a fall in the underlyingasset price.
Rationale■
To make a better return than if you had simply sold short the stock itself. Doensure that you give yourself enough time to be right; this means you shouldgo at least six months out, if not one or two year LEAPs. If you think these are
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The Bible of Options Strategies
expensive, then simply divide the price by the number of months left to expiration and then compare that to shorter-term put prices. You will see thatLEAPs and longer-term options are far better value per month, and they giveyou more time to be right, thus improving your chances of success. Anothermethod is to buy only deep ITM options.
Net Position■
This is a net debit transaction because you pay for the put option.
■
Your maximum risk is capped to the price you pay for the put.
■
Your maximum reward is uncapped until the stock falls to zero, whereuponthe maximum profit is the strike price less what you paid for the put.
Effect of Time Decay■
Time decay works against your bought option, so give yourself plenty of timeto be right.
■
Don’t be fooled by the false economy that shorter options are cheaper.Compare a one-month option to a 12-month option and divide the longeroption price by 12. You will see that you are paying far less per month for the12-month option.
Appropriate Time Period to Trade■
At least three months, preferably longer depending on the particularcircumstances.
Selecting the Stock■
Choose from stocks with adequate liquidity, preferably over 500,000 AverageDaily Volume (ADV).
■
Try to ensure that the trend is downward and identify a clear area ofresistance.
Selecting the Option■
Choose options with adequate liquidity; open interest should be at least 100,preferably 500.
■
Strike—Look for either the ATM or ITM (higher) strike above the currentstock.
■
Expiration—Give yourself enough time to be right; remember that time decayaccelerates exponentially in the last month before expiration, so give yourself aminimum of three months to be right, knowing you’ll never hold into the lastmonth. That gives you at least two months before you’ll need to sell. Longerwould be better, though.
The Four Basic Options Strategies
1.3.3 Risk Profile■
Maximum Risk
■
Maximum Reward [Put strike  put premium]
■
Breakeven
[Put premium]
[Put strike  put premium]
1.3.4 GreeksKey:ExpirationToday – 6 monthsTime(t) – 1 monthRisk ProfileAs the stock pricefalls, the long putmoves into profitmore and morequickly, particularlywhen the stock priceis lower than thestrike price.DeltaDelta (speed) is negative and moves at itsfastest rate aroundthe strike price, untilit reaches -1. Noticehow Delta is zerowhen the option isdeep OTM.
Risk Profile
Theta
ThetaTheta is negative,illustrating that timedecay hurts the longput position.
Delta
Vega
VegaVega is positive, illustrating that volatilityis helpful to the position because highervolatility translatesinto higher optionvalues.
Gamma
Rho
RhoRho is negative, illustrating that higherinterest rates wouldreduce the value ofthe puts and therefore hurt the position.
GammaGamma (acceleration)is always positive witha long put, and itpeaks when Delta isat its fastest (steepest) rate.
1.3.5 Advantages and DisadvantagesAdvantages■
Profit from declining stock prices.
■
Far greater leverage than simply shorting the stock.
■
Uncapped profit potential with capped risk.
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Disadvantages■
Potential 100% loss if the strike price, expiration dates, and stock are badlychosen.
■
High leverage can be dangerous if the stock price moves against you.
1.3.6 Exiting the TradeExiting the Position■
Sell the puts you bought!
Mitigating a Loss■
Use the underlying asset or stock to determine where your stop loss should beplaced.
1.3.7 ExampleABCD is trading at $28.88 on February 19, 2004.Buy the January 2005 $30.00 strike put for $4.38.You Pay
Put premium$4.38
Maximum Risk
Put premium$4.38Maximum risk is 100% of our total cost here
Maximum Reward
Strike price  put premium$30.00  $4.38  $25.62
Breakeven
Strike price  put premium$30.00  $4.38  $25.62
1.4 Short (Naked) PutProficiency
Direction
Volatility
Asset Legs
N/AIntermediate
Bullish
Max Risk
Max Reward
Strategy Type
Capped
Income
!
Short Put
Capped*
*Risk uncapped until the stock falls to zero.
1.4.1 DescriptionSelling a put is a simple, short-term income strategy. A put is an option to sell. Whenyou sell a put, you have sold someone the right to sell. As the stock falls, you maybe obligated to buy the stock if you are exercised. Therefore, only sell puts Out of the
The Four Basic Options Strategies
Money and on stocks you’d love to own at the strike price (which is lower than thecurrent stock price).The maximum risk of a naked call is the strike price less the premium you receive.Some people consider this to be an unlimited risk profile, and others consider it to belimited risk. A compromise is to consider it unlimited until the stock falls to zero—in other words, unlimited until the stock falls to zero.
Sell put
Steps to Trading a Naked Put1. Sell the put option with a strike price lower than the current stock price.■
Remember that for option contracts in the U.S., one contract is for 100shares. So when you see a price of $1.00 for a put, you will receive $100 forone contract.
■
For S&P Futures options, one contract is exercisable into one futures contract. If the option price is $1.00, you will pay $250 for one futures contractupon exercise.
Steps In■
Try to ensure that the trend is upward (or sideways) and identify a cleararea of support.
Steps Out■
Manage your position according to the rules defined in your Trading Plan.
■
Hopefully the stock will rise or remain static, allowing your sold option toexpire worthless so that you can keep the entire premium.
■
If the stock falls below your stop loss, then exit the position