free option strategy

Bull Call Spread – Free Trade Idea

Every Friday we give you a free options trade idea identified by Option Party. Today, we’re focusing on the bull call spread.

OPPORTUNITY

There is an attractive bull call spread trade in NETFLIX (NFLX). Currently it is trading for $353.16.

CHARACTERISTICS

There is a 67.6% chance the stock will close above 330.00 on 10-19-2018, and you will earn your target return of $1,177.55. There is a 71.6% chance the stock will close above 324.11 on 10-19-2018, and you will earn a profit. There is a 14.8% chance the stock will close below 300.00 on 10-19-2018, and you will have a total loss of $4,807.55.

ENTRY PLAN

To enter this position you will buy 2 call options expiring on 10-19-2018 with a 300.00 strike price and sell 2 call options expiring on 10-19-2018 with a 330.00 strike price. This will require a net debit of $24.00. The commission for this trade will be $7.55.

DISCLAIMER

All information presented here is current as of October 5, 2018 11:18 AM (EST). All trading involves risk. Free trades ideas are presented for illustrative purposes only and are not to be construed as financial advice.

Should You Be Paper Trading Stocks Right Now?

It doesn’t matter which market we’re talking about and paper trading still applies. Be it stocks, bonds, options, futures or forex. Whether new to the game or a seasoned veteran, all investors should consider some form of paper trading in their account.

One might ask, what is paper trading?

It’s just like regular trading, but without actual money on the line. Essentially, it’s simulated trading. Assuming a quality program, investors still see real prices, real orders and real spreads. But what’s the point of trading without real money? The point is to hone a new strategy, work out the kinks on an existing strategy or learn the ropes.

Some traders do not like paper trades. They say that without skin in the in game, new traders treat simulated trading too much like a game. They aren’t invested in the process the way they would be if their real, hard-earned cash was on the line. To a large extent, that’s true. But that doesn’t mean paper trading should be completed avoided.

In fact, it doesn’t matter what level of trading the investor has under their belt. Paper trading has its benefits and that means it should at least be considered.

Why You Should Consider Paper Trading

Consider a brand new investor. Someone who doesn’t even know how to place a buy/sell order or know the difference between market orders and limit orders. Do you think they should go right to live trading? Of course not!

Paper trading offers a platform that allows them to get comfortable with trade execution. It may also allow them to get comfortable with specific stocks and certain strategies.

Experienced traders with proven systems can also be big beneficiaries of paper trading. Some traders have a system that works quite well, churning out consistent gains month after month. But what if a small tweak — an adjusted stop-loss or different order quantity for high-probability trades — made an improvement to their system?

If the trader can run the two systems side by side, they could observe the differences in real time, as well as over a set period of time. The current system would run on a live account with real funds, while the new system would run on a paper trading system. This would allow the trader to determine whether the tweaks were worthwhile or whether they should be discarded.

I have personally seen some rather successful traders implement a strategy like the one above. I’ve also witnessed traders with a successful system in place who paper trade a new system to make sure it’s worthy of putting real money behind.

Finally, when some traders hit a rough patch in their trading, they can head back to simulated trading for a few sessions to get their “edge” back. 

The Drawbacks to Paper Trading

As with most situations in life, everything has its drawbacks. Paper trading is no exception. When investors are live trading, it’s not always a guarantee that their order will get filled or that their entire order will fill. In paper trading though, so long as the price hits the “paper order,” the full trade will fill.

That can give paper trading investors a false sense of confidence in their strategy. This is particularly true in high frequency trading or with securities that have low volume.

Aside from a false sense of security with order fills, investors have to deal with the potential of overconfidence. Without real emotions or real money invested in the paper trading strategy, investors can get lulled into the idea that the system is better than it really is. Further, can they execute their strategy the same in a live account? If they can’t, the trader may very well be susceptible to cutting winners early and letting losers run.

There’s also the question of time. How long do traders test in their paper trading account? A few weeks or months may feel like long enough, but it could really be the strategy just hitting a “sweet spot” in the market. When conditions change — going from a trending market to a choppy one or going from low volatility to high volatility — perhaps the strategy does terribly.

Finally, while some systems do, most paper trading accounts don’t account for commissions. While not a huge component to the bottom line, commissions and fees do add up over time and are rarely accounted for in paper trading. 

Paper Trading With Options

With that said, investors have to decide whether paper trading is best for them or not. Clearly, the pros outweigh the cons so long as investors are aware of the key points going into it.  

Earlier we mentioned that traders may consider using a paper trading system when getting into new securities. Just because someone is new to options or futures does not mean they’re new to trading. Even more so, just because someone is experienced in trading a specific asset, such as options or futures, doesn’t mean they should avoid paper trading either.

They more than anyone already have experience setting a realistic outlook and keeping their emotions in line. In that respect, they’re perfect for simulated trading. With options specifically, there are a plethora of strategies to choose from. Unlike stocks, which are essentially buy and sell orders, there are a dozen or so options strategies and even more “unique” situations that come up every once in a while.

For many, they are not well-versed in all of these strategies and may want to consider paper trading them at first. Be it bull call spreads, credit spreads, dividend capture strategies or other concepts. This will at least give them an idea on whether they have the proper structure to their new strategy. If so, they can make tweaks in their paper account to eventually take it live. If not, they can head back to the drawing board, but at least it didn’t cost them real capital first.

free option strategy

Cash Secured Put – Free Trade Idea

Every Friday we give you a free options trade idea identified by Option Party. Today, we’re focusing on the Cash Secured Put.

OPPORTUNITY

There is an attractive Cash Secured Put – Free Trade Idea in OMEROS (OMER). It is currently trading at $24.73.

CHARACTERISTICS

There is a 78.8% chance the stock will close above 19.00 on 10-19-2018, and you will earn your target return of $113.75. There is a 81.1% chance the stock will close above 18.43 on 10-19-2018, and you will earn a profit. There is a 0.0% chance the stock will close at or below 0.00 on 10-19-2018, and you will have a total loss of $3,686.25.

ENTRY PLAN

To enter this position you will sell 2 put options expiring on 10-19-2018 with a 19.00 strike price. This will produce a net credit of $0.60. The commission for this trade will be $6.25.

DISCLAIMER

All information presented here is current as of 9/28/2018 11:09 am EST. All trading involves risk. Free trades ideas are presented for illustrative purposes only and are not to be construed as financial advice.

 

How to Repair Your Stock Losses With Options

No matter what facet of life we’re talking about, nobody is perfect. We all make mistakes at our jobs, doing house projects, cooking and driving. Whether we’re talking about an Average Joe or a professional, it doesn’t matter.

It’s not unlike what Tom Brady said after losing Super Bowl LII to the Eagles in February 2018. “Guys, this is sports. [You] doesn’t always win,” Brady said. “You try the best you can try, and sometimes it doesn’t go the way you want it to, but that doesn’t discourage you from trying again.”

That extends to the finance world too. Unless you’ve never placed a trade before, we’ve all chalked up some marks in the loss column. That’s just the way it goes and when you talk to disciplined, experienced traders, they have no problem talking about their losses or acknowledging that they take them often in an attempt to keep them small. 

Sometimes though, we end up with that big loser and we need a way to fix the situation. Maybe it’s too late to sell or perhaps shares had a big gap down. Maybe it’s a long-term position we don’t want to part with but are simply looking to use leverage to repair some of the recent losses.

No matter what the situation is, there’s a way to use options to repair your stock losses. How? Let’s look.

Managing Stock Losses

Before we look at options, let’s look real quick at what we can do when we face losses. If we buy 100 shares of ABC at $30 apiece, we’re committing $3,000 to the trade. If shares gap down to $25, our stake is down $500 to $2,500, good for a loss of almost 17% on paper.

What choices do we have? We can cut and run, stopping out of the position and look for a better opportunity. We can also sit on our stake and hope for a rebound in the stock price. Finally, we can add to our position, looking to buy more stock at a lower price and hope for a smaller rebound.

Should we cut our losses, we’ll be saddled with the $500 loss. If we sit still and hope, we could see those losses erased or watch them grow worse over time. If we add to the position — say, buying 100 more shares at $25 apiece, bringing our total position to 200 shares at a cost basis of $27.50 — we still have the $500 loss on paper. However, we now only need the stock to recover half of its $5 per share drop to bring us back to breakeven. The downside of adding is obvious though, in that we increase our equity stake significantly and now have even more capital at risk.

Using Options to Repair Your Stock Losses

Dealing with stock losses has been a battle for decades. The pros and cons that come with each decision — bail, hold tight or double down — vary by each scenario. However, by using options there can be a way out.

We can do this by entering a call ratio spread. In the stock repair form, it involves selling two upside call options and buying one closer to the money call option. Let’s put this strategy into perspective before describing it much further. For the below situation, we’ll use the ABC position we outlined above.

We own 100 shares of ABC with a cost basis of $30, while shares currently trade near $25. As a result, we decide to sell two $27.50 call options for $0.60 apiece and buy one $25 call option for $1.20. Because we own 1 call option and 100 shares of stock, we’re “covered” on the spread trade.

On the plus side, by owning 100 shares and buying 1 call option, we can sell two upside calls and use it to get our net debit down to zero. There’s no cost to us and we could reap some solid returns in a short period of time should ABC rebound. Like the double-down method, we only need a 50% rebound from the initial decline. Unlike the double-down trade though, we aren’t putting any additional capital at risk.

We don’t get to have our cake and eat it too; there are downsides to the trade. The first is that, should ABC recover to $27.50, we won’t have any gains, we’ll simply breakeven on the trade. The second is that, by staying long the 100 shares and not collecting any credit from the options trade, we are exposed to further declines in original stock position.

Keep in mind though, a rebound to say, $30 on expiration will be cut short, as we are short the two $27 call options. On the flip side, a rally back to $27 on expiration will net us $2 per share on the 100 shares we are long and $2 per share ($200 total) on the $25 call option, leaving our net losses at just $50 (or 50 cents per share), without parting ways with any of our stock.

Repair Your Stock Losses on Short Positions Too

The same strategy can be deployed on short-selling strategies. But instead of using calls, you would use put options to repair your stock losses.

For instance, say we sold short 100 shares of XYZ at $50 and shares quickly ran up to $60. How might you go about repairing those losses? One may consider buying one $60 put and selling 2 $55 put options. Between the 1 long put and -100 shares, we are “covered” on selling the two put options. A further rally in XYZ though will continue to add to the losses.

So should you repair your stock losses with options all of the time?

It’s unlikely that that will be the case. As we discussed with the stock-only repair strategy — bail, hold tight or double down — which one to use depends on the situation. The same applies to using options. At times it will be appropriate and at other times, it won’t.

But at least you know how to do it.

how dividends impact options pricing

How Dividends Impact Options Pricing

Just because you trade options, doesn’t mean you should forget about dividends. Do you know just how dividends impact options pricing?

By trading and using options, there are certain benefits and drawbacks for doing so. One drawback? Even when we are long and bullish on a stock, we will not collect a dividend when using options unless we are long the stock as well.

The only way we can be long a security via options and collect the dividend is to exercise the position (call options for instance) and get long the stock. The alternative would be to get exercised by someone else (short puts for instance) before the ex-dividend date. But now we’re getting ahead of our skis a little bit.

Let’s back up and talk about how dividends impact options pricing. It’s not as cut-and-dry as you might think and just because we use options instead of stock doesn’t mean we aren’t affected.

Accounting for Dividends

So how does it work?

Recall the basic mechanics of a stock dividend. Assuming we’re working with cash dividends, which is a majority of dividends, that will impact the stock price. So if company ABC pays a quarterly dividend of 25 cents per share, then the stock price — in theory anyway — drops by that amount on each ex-dividend date of the year.

Remember, an ex-dividend date is the first day that a stock trades and investors won’t collect the dividend. That’s because it takes three days for a stock to settle. As a result, the ex-dividend date is two days before the record date, the date investors have to be “on record” of owning the stock to collect the company’s payout.

how dividends impact options pricing

In most circumstances, the change in the stock price is minimal due to the dividend. That’s because the stock still goes through a normal day of trading. It’s entirely possible for shares to rally, fall or end flat on the session.

All of this circles back to the option price. Simply put, market makers and option professionals aren’t dummies. Neither are the algorithms. As the ex-dividend date approaches, investors of all sorts already know what the payout will be thanks to the company’s previously announced dividend declaration. As the date nears, call premiums are reduced and put premiums increase. 

That’s because we know the event is coming and can adjust accordingly. This doesn’t necessarily happen the day of or the day before the ex-dividend date. It can start a week or two ahead of the event, depending on the security and the size of the dividend.

Essentially, that’s how dividends impact options pricing.

Should You Bet on Downside or Protect Against Downside?

Some investors may wonder, if the stock is set to decline by the dividend amount, should I buy put options to bet on a decline/protect my long position? Some may wonder if they should sell upside calls for the same reason. Either way, the short answer is the same: No.

The reasoning is simple. We don’t know how much or even if the underlying security will decline.

If XYZ is paying a quarterly dividend of 50 cents per share, the stock will be expected to decline by 50 cents. But maybe XYZ has great fundamentals and the market is strong. As a result, shares rise by 75 cents apiece on the ex-dividend date. If we opened a bearish options position ahead of that event, we’d be sitting on losses as a result.

There’s not a loophole or catch with this. It’s comes down to a simple game of gambling, which isn’t something we’re advocates of. There’s no edge in this method and therefore traders should find a different strategy to pursue. That’s why, even though we know dividends impact options pricing, the results are simply too random on an individual basis. 

One Dividend Strategy to Consider

There is one dividend strategy to consider. Did you know you can attempt to capture dividends with the use of options? The strategy is actually quite simple.

It involves buying 100 shares of a stock and selling an in-the-money covered call against the position. The goal is to collect the dividend and exit the position, either by exercise or closing the position. Here’s a quick example.

  • Buy 100 MNO for $54 and sell the $50 call option for $4.45
  • Net credit: $4,955
  • Quarterly dividend: $0.40

We’re selling the covered call to essentially protect our equity position. We’re protected down to the strike price minus the credit collected, or down to $49.55 in this case. Below that and we start to see losses. Should the call owners exercise the position early so they can capture the dividend, we get to keep the premium we collected.

In this case, we profit on just $0.45 of the credit, a nearly negligible amount once we account for commissions.
However, the goal is to collect the quarterly dividend of 40 cents a share as well. If we can pocket the credit or profit on the covered call from time decay, that works too.

This is an admittedly conservative strategy. But the goal is to extract a dividend payment while taking on significantly less risk than by owning outright equity in the stock. That’s one consideration when it comes to stocks, dividends and options.

free option strategy

Covered Call – Free Trade Idea

Every Friday we give you a free options trade idea identified by Option Party. Today, we’re focusing on the classic covered call.

OPPORTUNITY

There is an attractive covered call trade in GERON (GERN). It is currently trading at $5.60.

CHARACTERISTICS

There is a 74.3% chance the stock will close above 4.00 on 09-21-2018, and you will earn your target return of $145.35. There is a 75.9% chance the stock will close above 3.87 on 09-21-2018, and you will earn a profit. There is a 1.1% chance the stock will close at or below 0.00 on 09-21-2018, and you will have a total loss of $4,649.70.

ASSIGNMENT

For call options that are in the money when sold, the assigned return will be the same as the target return. For call options that are out of the money when sold, the assigned return will be more than the target return. There is a 74.3% chance the stock will close above 4.00 on 09-21-2018, and you will earn a return of $145.35.

ENTRY PLAN

To enter this position you will sell 12 call options expiring on 09-21-2018 with a 4.00 strike price and buy 1200 shares of stock for 5.60. This will require a net debit of $3.86. The commission for this trade will be $17.70.

DISCLAIMER

All information presented here is current as of 9/14/2018 11:33 pm EST. All trading involves risk. Free trades ideas are presented for illustrative purposes only and are not to be construed as financial advice.

How to Start Options Trading With Your Current Portfolio

Are you a long-time or even a somewhat new trader who’s found their go-to strategy, but hasn’t dabbled with options? Instead you might see others on Twitter or StockTwits racking up impressive gains, hedging their portfolios and doing all sorts of different things with options. But you might not have options approved for your account, even if you are an experienced trader.

That doesn’t mean the investor isn’t qualified to trade options or that they won’t be allowed to it. It simply means that their broker needs to approve their account for options trading. So how do we do that? Getting approval is usually pretty easy, but it varies by account and by broker.

Let’s look at answering some questions to help investors who are looking to start trading options.

What Are Options Trading Levels?

In stock trading, there are a few different account types. But to keep it simple, there are cash accounts and margin accounts. The former only allows investors to buy and sell stocks with their own funds. With a margin account, they can borrow money from their broker to execute trades. Many seasoned investors recommend not borrowing on margin, and for good reasons. The interest rates are high and it often puts investors into a levered position that they do not properly maintain or evaluate the risk for.

So why then do people use margin accounts?

For starters, it makes short-selling a much easier proposal. Second, it’s a necessary component to unlocking higher levels of options trading. Besides, just because a margin account makes this possible, doesn’t mean we’re using that margin to execute the trade.

So what are these levels?

In a nutshell, brokers categorize different trading strategies into different levels. Generally speaking, most brokers have about four different options trading levels. For instance, here are two different brokers and their various options level.

The first is from E-Trade:

options trading

This is from Fidelity:

options trading levels

Remember when we talked about cash accounts vs. margin accounts? While that could be its own separate conversation, one difference is their impact on options trading. Cash accounts can be approved for options trading, but only debit trades are allowed. That being strategies like long calls and puts or buying straddles and strangles. The exception would be “covered” credit trades, such as the cash-secured put or covered call.

Beyond those strategies, investors will often need a margin account. That will be necessary to engage in both credit spreads and debit spreads, as well as naked put sales. That is often Level 3 options trading, while Level 4 and possibly Level 5 (such as with Fidelity accounts) allow for naked straddle and strangle sales, as well as naked call sales.

How to Ask for Options Approval

This process is generally pretty simple. If you already have a trading account, head on over to your account settings. There is usually a tab, icon or button to explore options trading. New accounts can request options trading when setting up. Although, it’s worth mentioning that completely new traders to the stock market should exercise caution when using options, as they are easy to misuse.

In any regard, simply examine your broker’s various options trading levels and request the level you would like access to. Certain account types do not allow for options trading or they have limits to what levels will be approved. For instance, an IRA account is different than a standard brokerage account, in that it does not use margin.

You will also need to fill out a questionnaire, answering questions about your liquid net worth, income and employment. Your broker will also ask about your knowledge of options trading, which strategies you have experience with and request that you “review and understand” several documents.

The process is generally pretty simple and doesn’t take much time.

Other Considerations

As we have mentioned a few times now, the experience will vary from broker to broker. So will the different requirements and options levels. However, it’s up to each trader to determine what their goals and needs are when it comes to options trading.

For instance, if a trader’s goal is simply to be able to hedge their position with a protective put or generate income via a covered call, that’s generally a pretty easy strategy to get approved. So long as the trader has the funds to purchase at least 100 shares of the security they’re looking to trade options on, there shouldn’t be much of an issue. However, those looking to enter more complicated positions will need (and want) a margin account.

Margin accounts require $2,000 to open and provide investors with a lot more flexibility. First, they don’t have to worry about trading settled funds like cash-only accounts do. Second, a number of different options trading strategies become available. And remember, just because you have a margin account, doesn’t mean you have to trade on margin. 

Keep in mind though, options trading is difficult. It’s much more difficult than trading stocks. While they add plenty of flexibility to one’s account in terms of what the investor is now capable of doing, options have many more variants compared to stock trading. There’s volatility measurements, expiration dates, deltas and a whole host of considerations.

That said, with proper preparation, investors can add this versatile tool to their investing toolbox.

free option strategy

Bull Put Spread – Free Trade Idea

Every Friday we give you a free options trade idea identified by Option Party. Today, we’re focusing on the bull put spread screener.

OPPORTUNITY

There is an attractive bull put spread trade in TESLA (TSLA). It is currently trading at $267.54.

CHARACTERISTICS

There is a 96.0% chance the stock will close above 205.00 on 09-21-2018, and you will earn your target return of $146.45. There is a 96.2% chance the stock will close above 204.27 on 09-21-2018, and you will earn a profit. There is a 0.7% chance the stock will close below 180.00 on 09-21-2018, and you will have a total loss of $4,853.55.

ENTRY PLAN

To enter this position you will buy 2 put options expiring on 09-21-2018 with a 180.00 strike price and sell 2 put options expiring on 09-21-2018 with a 205.00 strike price. This will produce a net credit of $0.77. The commission for this trade will be $7.55

DISCLAIMER

All information presented here is current as of 9/7/2018 11:33 am EST. All trading involves risk. Free trades ideas are presented for illustrative purposes only and are not to be construed as financial advice.

 

How You Can Get Paid to Buy Stocks

Did you know there’s a way of getting paid to buy stocks? It sounds ludicrous and not realistic. But quite honestly, it is very real and very much a possibility. Investors who want to take advantage need to understand options though. They also need to understand how to leverage these derivative instruments and most importantly, they need to know how to use them responsibly.

The strategy? Selling put options.

But we can’t do this blindly, for we will eventually run into trouble. Let’s start with a famous lesson, with a fund that may ring a bell: Long-Term Capital Management.

The company and its managers thought they had finally cracked the code. It may have seemed like the next Ken Griffin or Bill Benter, the almost-billionaire who built an algorithm to win every horse race. In the first year, LTCM returned 21%, followed by returns of 43% and 41% — after fees! — in the following two years, respectively.

Everything seemed fine, as the company was essentially selling bundles of deep out-the-money put options in a raging bull market. Of course, that’s not the only strategy the company engaged in, but its use of leverage helped ultimately do them in. Operating with almost $5 billion in funds, the company had assets totaling about $125 billion, good for 25-to-1 leverage.

When the you-know-what hit the fan, guess who had to liquidate, as they racked up over $4 billion in losses in four months. That margin call got ugly, with a number of big banks and even the Federal Reserve getting involved. LTCM was eventually liquidated and dissolved.

While E-Trade, Fidelity, or seemingly any other broker is unlikely to grant traders 25-to-1 leverage, the point here is simple: be careful using it. 

Getting Paid to Buy Stocks

When we say getting paid to buy stocks, we’re talking about entering a short put position to create a bullish position on a particular equity or ETF. The most conservative way of doing so would be to perform the cash-secured put sale.

What does that mean? Say you’re bullish on shares of Apple (AAPL). A levered up investor may consider selling 10 of the 200 strike October puts for $1.00 apiece. That may net $1,000 in net credit — an amount the trader can keep should Apple close above $200 on expiration. However, do they realize that they are also obligated to buy 100 shares of Apple at $200 ($199 after factoring in the net credit) for each contract they sold?

That’s 1,000 shares of Apple and $200,000 worth of equity. That $1,000 we collected in net credit looks like pocket change now, huh?

For some, they can swallow that $200,000 exercise. Some may even be comfortable with it. For a large number of traders though, this sum is simply too great of a risk. Say Apple falls to $190 on expiration. We’re looking at a gross loss of $10 per share (net loss of $9 per share when accounting for the net credit). That’s a $9,000 loss should we close the position. If we exercise instead, we’re paying $199,000 for a position only worth $190,000.

Again, there are traders that can and may happily swallow this position without batting a lash. But for many, a $9,000 loss will wipe out significant capital. Whether we’re traders or investors, we both want to avoid an unsustainable hit.

Responsible Put Sales

That’s why the cash-secured language is so important. It means that we have the cash necessary to purchase the stock should the position get exercised. In the case of Apple, say we have $21,000 ready to invest in the stock. But instead of plunking all that cash down right now, we can use put sales to take our long position.

By selling, say one $210 put, we’re entering an agreement with the put buyer, saying we’re willing to buy 100 shares of Apple at $210 apiece if Apple is below $210 on October expiration. This speculator may be buying the put either as protection or an outright bet on a decline. It could also be a leg of a more complicated position. Who knows.

But in any regard, we will receive a net credit of $1.70 for taking on such an obligation. For the record, that’s almost 60% of Apple’s entire annual dividend, which pays out $2.92 per share. Say Apple stock trades higher, flat or even slightly lower into expiration. We get to keep our entire net credit so long as it at or above $210 on expiration.

Want a higher net credit? Choose a strike price closer to at-the-money. But just know, the closer it is, the more likely it is to be exercised.

Say we replicate this strategy three times over, before finally being exercised on the fourth cash-secured put sale. We’ll have almost $700 in net credit (more than double the annual dividend, assuming $1.70 in net credit for each put sale) and then will finally have a long position in Apple with 100 shares at a much lower cost basis. 

That contrasts with buying the stock outright for almost $230 per share at current prices and sitting through a big decline.

Analyzing Risk

Some investors will argue that this “getting paid to buy stocks” is all hype and that it’s really quite risky. That’s not entirely true. It’s true that getting paid to buy stocks isn’t someone giving us money while we simultaneously purchase shares. But it does represent investors collecting a net credit for agreeing to buy an equity stake at a predetermined price. This strategy works particularly well for stocks we want to own in the first place.

Detractors will argue that the cash-secured put strategy is risky. To that, it’s only overly risky in a few ways, one of which is using too much leverage. However, if we use the cash-secured put and plan to buy 100 shares (or in multiples of 100) anyway, then it is actually less risky.

Sticking with Apple, by agreeing to buy 100 shares at $210, our risk is actually $208.30 per share (factoring in the net credit) or $20,830 overall. The risk for those buying 100 shares today is actually about $28,000.

While a large gap-down may catch put-sellers off-guard, it’s not as if equity holders feel any better. The losses for a put-seller are only greatly exacerbated when they use too much leverage. Or when they only want to buy, say 30 shares of Apple, but sell a put representing 100 shares. That’s something to consider too.

When used correctly though, getting paid to buy stocks is an attainable strategy using cash-secured put options.

free option strategy

Bear Call Spread – Free Trade Idea

Every Friday we give you a free options trade idea identified by Option Party. Today, we’re focusing on the Bear Call Spread .

OPPORTUNITY

There is an attractive bear call spread trade in NETFLIX (NFLX). Currently it is trading for $373.41.

CHARACTERISTICS

There is a 92.8% chance the stock will close below 425.00 on 09-21-2018, and you will earn your target return of $152.45. There is a 92.3% chance the stock will close below 425.76 on 09-21-2018, and you will earn a profit. There is a 1.4% chance the stock will close above 450.00 on 09-21-2018, and you will have a total loss of $4,847.55.

ENTRY PLAN

To enter this position you will sell 2 call options expiring on 09-21-2018 with a 425.00 strike price and buy 2 call options expiring on 09-21-2018 with a 450.00 strike price. This will produce a net credit of $0.80. The commission for this trade will be $7.55.

DISCLAIMER

All information presented here is current as of August 31, 2018 11:27 pm (EST). All trading involves risk. Free trades ideas are presented for illustrative purposes only and are not to be construed as financial advice.