Option Trading has a place in most portfolios. We have over 10 years of Option trading experience. Ask us if it is a good fit for your portfolio. And don't worry about unlimited losses. The primary purpose of option trading is to reduce risk. We can help you with that.

OPTION TRADING CAN BE DANGEROUS (but not the way we do it)

A failure to understand the potential outcomes of an option trade (Naked Calls, etc...) is the number one reason for headline generating losses. We don't trade that way.

We have professional options trading experience and would be happy to talk to you about strategies that could enhance or protect your portfolio. Don't be afraid to ask.

For example, a strategy that makes sense to incorporate into a lot of portfolios is selling covered calls. We would be happy to discuss with you, whether or not covered calls could be a good addition to your trading. And if the answer is yes, we are also available to assist you in the actual trading. Ask about our SPY^TM Covered Call Program.

Covered Calls
For conservative investors, selling calls against a long stock position can be an excellent way to generate additional income, especially if the stock becomes stagnant. The call premium received from the sale also gives some protection against a price decline on the long stock position. However if a stock does move rapidly to the upside the investor will be limited in the potential profit of the position due to the sale of the call.

Example
Let's imagine that you would like to purchase 100 shares of Disney (DIS) stock with the stock at $24.40. Pleased with the overall growth rate, you would like to hold the stock rather than sell it. Rather than just sitting back and collecting the Disney dividends, you can use options to generate additional income at minimal risk to you.

With the stock at $24.40 you could sell one 27.5 call in the near month at $0.90. As each call is valid for 100 shares you are only able to sell one call.

Knowing the stock price hasn't fluctuated much, you might have confidence that it isn't going to move higher than $27.50 in the short term. After all, that would be a more than 10% move. At expiration, if the stock is still below $27.50, you keep the $90 you received by selling the calls and the 100 shares of stock. At that point, you might decide to write another call for a future month.

Should the stock rise unexpectedly above $27.50, you will have two choices. You can either buy the calls back and keep the stock. Or, you can let the stock be called away and sell your 100 shares (1 contract x 100 shares) at the strike price of $27.50. The good news, in this case, is that you participated in the rise from $24.40 to $27.50 on the 100 shares you sold at 27.5. In doing so, you locked in an additional $310 in profit. The bad news is that you may have capital gains tax issues to deal with-especially if you've owned the stock for a long time and your cost basis is low.

Using Near Month Options
When writing covered calls, most investors tend to sell near month options for two reasons. First, the earlier the expiration, the less opportunity the stock has to trade through the strike price. Second, and equally important, is the role time decay plays in the value of the options. Like all out-of-the-money options, the call in the example above has no intrinsic value. As such, the only value is the time premium or time value which, in the final month before expiration, decays more and more rapidly. For these reasons, investors often sell options that have one month remaining until expiration

There are many other ways to trade options. Learning how to, however, can be as difficult as learning a foreign language. Let us help you. Contact us today!

Options involve risk and are not suitable for all investors.