Options for Risk-Free Portfolios: Profiting with Dividend by M. Thomsett

By M. Thomsett

A complicated strategic method utilizing thoughts to lessen industry hazards whereas augmenting dividend income, this title moves past the fundamentals of shares and thoughts. It exhibits how the 3 significant segments (stocks, dividends, and strategies) are drawn jointly right into a unmarried and powerful technique to maximize source of revenue whereas disposing of marketplace probability.

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Additional info for Options for Risk-Free Portfolios: Profiting with Dividend Collar Strategies

Example text

In the swing trading strategy, the market risk of long options is not significant in comparison to the same strategy but with shares of stock. In this case, options are more practical as the Managing and Reducing Risk with Options 53 vehicle for the trade, especially if limited to those contracts due to expire in one month or less. ) Spread and Straddle Risks The risks specific to long and short combined strategies cover a broad range. For both long spreads and long straddles, the maximum loss is the sum of premiums paid to acquire both sides of the position.

The market risk is as severe as uncovered call risks, in the sense that if the stock price rises, losses in the shorted stock track that movement dollar for dollar. A mandatory 150% of the short stock value has to be maintained on margin, compared with 75% (or 50% in some hedged long put positions). Options can solve part of the problem related to shorted stock. The use of long calls, for example, is a form of an “insurance call” when a trader holds shorted stock. If the stock price rises above the strike of the call, the call’s intrinsic value grows point for point with the stock.

In both cases, no losses occur. As a result, the concern with market risk is managed effectively with the options strategies, a far superior and reliable method compared to the probability approach. Traders can only rely on the law of averages in favor of not experiencing a loss, on average; however, this is far from reassuring because losses are not individually mitigated. With options positions, there is no such probability. The elimination of long equity market risk is removed for as long as the option positions remain open.

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