High Profit, Low Risk Trading Techniques

High Profit, Low Risk Trading Techniques

Stocks - Covered Call - Protective Put (CC - PP) Strategy

As everyone knows, stock trading is risky and stressful. It can also be quite profitable at the same time. When compared to other investing options, such as real estate, trading can yield the highest return on investment. A return of, say, two to five percent may be obtained from money market accounts, CDs, or savings accounts. A 10% rate is what you may anticipate with mutual funds. Even with a long-term investment, such a yield might be difficult to come by given the state of the economy. Furthermore, neither you nor your financial advisor have any control over your investments. What then is a more lucrative and low-risk option?

This article's goal is to provide an example of a low risk, high reward trading technique that blends equities and options.

Major brokers have authorized covered calls and defensive puts in the majority of trading accounts. (Scottrade, E-Trade, Ameritrade, etc.)

With covered calls, you purchase stocks and sell one call (contract) for each hundred equities you purchase or own.

Invest in one protective put for each 100 stocks you hold. We purchase a put in this method, and it expires at least six months later.

Call and put prices rise and fall in tandem with an increase in stock price. The put price will be negatively impacted by elapsed time.

These Are the Stocks: Protective Put and Covered Call Strategies

Aim for an optionable stock that is heading upward. In this instance, let's refer to it as XYZ. Assume that the share price of XYZ stock is currently $69 on the market. Let's say that the first, second, or third week of February is when we are now. You purchase 100 shares of XYZ.

You then write a March covered call on XYZ with a strike price of $75. You receive extra money as a result, but you also have to sell the shares for $75. Let's say that writing the covered call brings you $150.

Even though the stock is rising and you have already profited $150, you cannot predict with certainty where the price of the stock will end up. Thus, under this strategy, purchase a put on XYZ with an expiration date of at least six months and a strike price of 70. Purchase the put for August or later in our situation. Let's say this comes to $800. As a result, even if the price of the XYZ stock falls below $70 before August's expiration, you will still have the option to sell it. (As of the date of this article, February 2006, JOYG's option chain with a strike price of 60 and its current price of roughly 55 provide a real-time example. Its October 2006 put was at ~6.5.)

Situations:

To demonstrate how this can be a low risk, big profit technique, let's look at a few examples.

Scenario 1: The shares will be called out if the price of XYZ stock rises over $75 by the expiration date in March. It will therefore be sold using your account. Typically, shares that are $0.25 "in the money" will be automatically exercised.

Your put price will drop because the stock price has increased. The put's delta is small because it is in the future. It might get about $600 if you can sell it. Put prices will decline as stock prices rise. You have the option to hold off on selling until it expires. The following formula can be used to get the net profit for 100 XYZ stocks:

Stock price = bought stock price + premium from covered call - put price = bought put price + sold put price.

Put another way, 7500 – 6900 + 150 – 800 + 600 = 550. That represents a 7.3% monthly return. which is equivalent to 87.6% annually.

Scenario 2: At the time of the March expiration, the stock price rises over 69 but stays below 75. The call will expire worthless in this situation, and you will keep the premium that you were paid for writing the covered call. For the same underlying stock, XYZ, you can write another call for April, potentially earning $150 to $200. Write as many covered calls as you like until the protected put expires or you are called out. A total return of 30% to 70% annually is possible.

Scenario 3: Normally, you would lose money on a trade if the stock price dropped, but not here!

Assume that by the time XYZ expires in March, its value has dropped to $65. The value of your portfolio would have dropped by $400 if you had merely dealt the stock. However, in this instance, regardless of how low the market goes, you may still sell the shares for $70 since you have the protective put.

If it's later on, like April or May, you will have written some covered calls and made some money. There are two options available to us in the event that the stock price drops. Either buy back the covered call or wait until it expires at the end of the current month. You have until the protective put expires to sell the stock at market price or exercise the put. When the stock price declines, the protective put price increases. Thus, you can sell the protective put at about 950 and the shares at its present price of 65.

You can write a covered call every month, so depending on how many months have passed, you can make $200 to $600.

Therefore, in this case, the net would be:

Stock price = acquired stock price + premium from covered call for each of the previous months + put price purchased + put price sold.

For example, 6500 – 6900 – 800 + 950 + 300 = 50. Despite the decline in the stock price, this will only be a breakeven. The maximum risk is the premium paid for the protective put less the money received from covered calls [minus/plus difference between the stock price and put strike price]. If the stock price drops even more, there might be a little bit more loss.

As a result, even if the stock price drops, you will still have a tiny profit, either no loss at all or a very little loss. All things considered, you have a great chance of reducing your risks.

This approach typically yields a healthy profit with relatively little risk in the other situations. This makes it a low risk, big payoff technique. Work on the specifics and trade the plan on paper.

Check out BeingLIVE.com/Stocks.html for a list of stocks that meet this strategy as of right now.

Notice: Nothing in this article should be interpreted as advice or a recommendation to buy or sell securities; it is published purely for informational reasons. Trading outcomes can change. It is not promised or implied that using the strategies in this article will lead to or ensure trading profits. Results in the past may not guarantee future performance.

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