Imagine if you buy a share for 16 dollar, and you rent it out for 40 cents. So you donât lose any money unless the share depreciates below 15.60, you earn money instead. At the same time you buy a put option for maybe 20 cents that enables you to sell the share automatically if it depreciates below 15.60. The return is 40-20= 20 cent per share and you have minimized the risks dramatically. And if you have 5000 shares worth 16 dollar you earn the premium received + Difference (if any, ) Between Strike Price and Stock purchase Price, assuming the strike price is above the stock purhcase prise. The profit is limited, but no risks? Is it really this easy to earn money through this method, or is there a downside to it or something i havn't thought of(i supect you can't sell the share automatically if it reach 15.60, since that might create a problem when you write a call option contract ) Or which methiod has best risk vs reward?
You are writing covered calls essentially, and you are leaving a lot on the table. By writing covered calls, you are trying to buy stocks that won't go up much. A destructive thing to do, IMO.
Ripley: So is there a risk to my strateygy? and if the strategy is not the best one, which one should i choose instead, considering best risk vs reward?
Almost risk free. But the rewards are so limited that whatever the risks that may become can wipe out all your rewards and more, making it very risky in terms of wasted money, time and effort. I am a n00b, so take whatever I say with caution.
A short call at a higher strike and a long put and a lower strike is called a Collar. There's no way to setup a collar for a credit, unless you leg in.
-Put-call parity will keep you from putting on the trade immediately.. -While you wait, if the stock goes down you're left holding a loss because you can't sell it on the off chance that it spikes snf you have to deliver and buy it at market. -You will rarely find options that go in such small increments. -Even if you do, the spread and commissions will get you.
Trend Fader: But if I buy a put option that allows me to sell the share automatically if it reach 15.6. Plus this is the best method to use if you want to buy a share that is slow at either direction, and your profit is heavily relied on the premium that you recieve. In this case, i have a big advantage since I can lose some money, which is the protection(plus the put option). And if the company has displayed a stable pattern,the share should not reach 5 dollar anyway(especially if you have done som heavy reseach on your company). And it dosnt matter if there is a profit limit, since I'm not going to reach that limit anyway, since the market price of the share is moving so slowly. And my sole profit is not if the share goes up in value, but the premium I recieve. It's almost like buying a cheap property and renting it.
Were you born this naive or have you attended special courses for this? If it was that easy don't you think everyone would be doing that!? What you're describing is a risk free position, which is impossible to put on all at once. In order to end up with something like this, you'll have to leg in and thus assume directional risk. Sorry, there's no free lunch!
MTE: So how do you leg in? I just read this strategy at a website today, and thought it was too good to be true. So which strategy gives the best risk vs reward?