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7 Best Options Trading Examples • 2020 • Benzinga

Learning how to trade options helps expand your trading choices. It’s a powerful tool you can use to speculate on and hedge against market moves. But how do you know which strategy to use in a certain situation? Follow the examples below for an introduction in matching a suitable option strategy with your trading personality…

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Learning how to trade options helps expand your trading choices. It’s a powerful tool you can use to speculate on and hedge against market moves. But how do you know which strategy to use in a certain situation? Follow the examples below for an introduction in matching a suitable option strategy with your trading personality and market view.

Simple Scalps

One of the simplest options trading strategies, scalping, typically takes a privileged market position to be consistently profitable. You must also be an extremely disciplined trader with a good understanding of the market and a solid internet connection. The following trades could take place over the space of seconds or even a second. Scalping is all about taking a little bit of profit with high-frequency trades, when possible, and giving the market no time to move significantly against you.

Riding a Rally: Buying Calls

Let’s say you buy 10 American Micro Devices (NASDAQ: AMD) $60 calls when the AMD price is $60 expiring in one month’s time on the 3rd Friday of next month. You pay a $2.70 premium for each option, totaling $2,700. AMD quickly moves up to $63 within a few days, and the now in-the-money $60 call option is worth $4.47 or $4,470 when you sell it, for a profit of $1,770.  

You enjoy a 52.5% gain on the $2,700 invested into the option rather than a 5% gain on $60,000 invested, while your losses remain limited to the amount you initially paid for the option

Playing the Dip: Buying Puts

You buy 8 Wal-Mart (NYSE: WMT) at-the-money puts each with a contract amount of 100 shares and struck at $130 for $1.31 to take advantage of what you think will be a short-term dip in the stock price. After a few minutes, the price of WMT dips from $130 to $128 and the put options are now worth $3.01 each. You profit by $1.70 per contract times 100 shares per contract and 8 contracts for a total gain of $1,360. That compares with making $2 on 800 shorted shares of the stock, which would be $1,600. While your gains may be lower in this scenario, your losses when buying the put option are limited to the premium initially paid, which is not the case with a short stock position. 

Profit from Portfolio Protection

Check out a few more examples.

Skimming Off the Top: Covered Call Writing

Let’s say your cost basis per share for Micron Technology (NASDAQ: MU) is $48, and the current price of the stock is $58 per share. You do not want to sell your 500 shares and take on the tax liability. You sell 5 call options on 100 shares each covered by your underlying shares with a strike price of $62 that expires in a week. You take in $250 of premium minus a nominal broker fee of $3 to sell the options. MU closes the week at a price of $61. The 5 options expire worthless and the options are not exercised. You keep the $250 premium less the $3 broker fee and all of your shares of MU stock. If the stock had instead declined in value, you would have had your losses buffered by the premium you received for selling the covered calls. 

Getting Paid to Purchase: Selling a Naked Put 

Apple (NASDAQ: AAPL) trades at $370, but you do not want to buy the stock unless it falls to $350. You sell a put at $350 for $16 on 100 shares that expires in 2 months and take in a premium of $1,600. In 2 months, AAPL shares are trading at $349. The option is assigned and you receive 100 shares of AAPL in your account the following Monday. Because of the premium you received, you essentially bought the shares at $334. Had the market gone the other way, your option would have expired worthless, leaving you with a $1,600 profit and no AAPL stock. 

Playing Both Sides of the Fence

Learn more about buying a straddle and selling an iron condor below.

Earnings Season: Buying a Straddle

Let’s say Adobe (NASDAQ: ADBE) will report earnings during the week, and you don’t know what the report will show. You believe that the company will give an important announcement that will move the price of the stock substantially — you just don’t know which direction the move will be. The stock is currently trading at $530. You purchase an at the money (ATM) straddle expiring in about a month consisting of a call and put at the same $530 strike price. Both options have a price of $27.55 each or $2,755 in premium since they are based on 100 shares each, so you spend a total of $5,510 for the straddle.

The price of ADBE skyrockets quickly to $580 after the earnings announcement. The put loses much of its $2,755 value to trade at $10 and so is worth $1,000. The call rises $1 in intrinsic value for each point for a total of $50 plus its remaining $10 in time value to trade at $6,000. The straddle now has a net value of $7,000, so your net profit, if you close the position out, is $1,770, less commissions.

Trading with an Iron Fist: Selling an Iron Condor

Let’s say you notice that Wal-Mart (NYSE: WMT) has been trading sideways for the past month and there are no indications that it will move away from that range. You set up an iron condor to take advantage of the net neutral movement. 

The stock is trading at $120. You sell a put spread, selling a put at $115 and buying a put at $110. You also sell a call spread, selling a call at $125 and buying a call at $130. You receive a net credit of $550 for the purchase minus a $12 broker fee or $538. All of the options have the same expiration date. At this expiration date, WMT trades at $118. All 4 options expire worthless. You keep the $538 net premium you took in at the start of the short iron condor trade.

Using Synthetics

One more example!

Long Term Dividend Capture: Long Put Hedge

Prudential Financial Inc (NYSE: PRU) was hit hard during the pandemic. Its dividend is at 6% and is paid in shares. You think the price will go up, but you want to receive the dividends while protecting your downside if another market crash occurs. 

You decide to buy 1,000 shares and 10 long puts — a synthetic long call. The puts are LEAPS and expire 2 years from now, giving you time to collect 2 years of dividends. The stock is currently trading at $60 so you pay $60,000 to own them. You buy the puts at a strike price of $40 and pay a premium of $4.50 per share or $4,500 and $30 in broker fees. You have now purchased downside protection for your long 1,000-share position below $40.

At expiration after 2 years, PRU trades at $80 and you have received 2 years of dividends on 1,000 shares at 6% per annum, or 120 shares. The puts expire worthless. You now own 1,120 shares of PRU worth $89,600, which you sell for a profit of $29,600. You then deduct the option costs of $4,530 to get your net profit on the trades of $25,070. 

Best Option Strategy

The options strategy you use should be based on current market conditions. For instance, selling at the money calls is a bearish strategy that works best in a sideways or declining market. In a bull market, simply holding stocks outperforms selling puts.

In a volatile market, the most effective options strategies involve following established directional trends. The major stock indexes do not always correlate well with each other, so stick to what you know as long as you also follow sound portfolio diversification techniques. 

The best option strategy to use can also depend on your personality. For example, can you deal emotionally with getting a small known income to take a substantial unknown risk that short options trading offers? If not, then buying or spreading options may offer the greater security you prefer. 

For best results in the current uncertain economic atmosphere, you may want to take a more conservative approach. To get more information on options and experience using them, take a look at every options trading example and try them in a demo account first.

Benzinga Options Newsletter

The Benzinga options newsletter provides timely strategies based on real-time market conditions. Sign up for more specific examples as well as general guidelines for successful options trading.

Best Options Brokers

The way that you connect to the options market can impact the overall success of your strategy. Even the best trading tactics might fall short if you can’t find the right option pricing data or experience lag or slippage at the time of order execution. Here are some of the best brokers for options traders.

Consider Whether Options are Right for You

Properly used options can allow you to engage in strategies and encapsulate market views that would otherwise be difficult for stock traders. Modern technology allows you to learn and implement everything from simple long calls to more sophisticated strategies. Traders and investors need education about how to make the most of this incredible market because it can otherwise become a missed opportunity or a very expensive hobby.

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Broker news

Donald Trump blasts ‘fools’ who oppose good Russian ties

US President-elect Donald Trump has posted a progression of tweets censuring the individuals who contradict great relations with Russia as “‘dumb’ individuals, or nitwits”.

Mr Trump promised to work with Russia “to comprehend a portion of the numerous… squeezing issues and issues of the WORLD!”

His remarks came after an insight report said Russia’s leader had attempted to help a Trump race triumph.

Mr Trump said Democrats were to be faulted for “gross carelessness” in permitting their servers to be hacked.

In a progression of tweets on Saturday, Mr Trump said that having a decent association with Russia was “no terrible thing” and that “lone “idiotic” individuals, or simpletons, would believe that it is awful!”

He included that Russia would regard the US increasingly when he was president

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Broker news

Bulls and Bears Took on More Currency Exposure in Week Through January

he most striking improvement among theoretical situating toward the finish of a year ago and the primary session of 2017 is not that modification were little. There was just a single gross theoretical position modification of more than 10k contracts. With sterling apparently not able to maintain even humble upticks, the bears added 13.1k contracts to the gross short position, lifting it to 120.2k contracts.

Or maybe, it is eminent that examiners for the most part added to positions, long and short, as opposed to close positions at the very end of the year. Examiners added to net long outside cash prospects positions, aside from in the Japanese yen and Swiss franc where 2.6k and 2.5k contracts were exchanged separately. Examiners likewise added to gross short positions. Here there was just a single exemption, the Japanese yen. Despite the fact that the dollar shut comprehensively higher in front of the end of the week, every one of the monetary forms we track here, spare the Mexican peso, picked up against the dollar in the three sessions since the finish of the CFTC reporting period.

Every once in a while it is helpful to review why many market members take a gander at the theoretical situating in the cash fates advertise. It is not that the outside trade is essentially a prospects showcase. It is principally an over-the-counter market in which every day turnover midpoints in abundance of $5 trillion a day.

Trade exchanged monetary forms and alternatives represented around 3% of the normal day by day turnover as indicated by the BIS study. Be that as it may, past reviews have discovered some contemporaneous connection between’s market heading and net position changes. We think it additionally offers knowledge into a specific market section of pattern supporters and energy brokers. It is not by any means the only device, yet one of a few data sources.

One ramifications of this is albeit theoretical positions in the money fates market are moderately extensive, it is still little contrasted and the money showcase. Along these lines, it is difficult to see the genuine essentialness of a record vast position, as though there is some market top. At some point, examiners are not driving the costs, possibly there is another fragment, national banks, enterprises, as well as genuine cash that is more essential at any given minute.

We invest some energy taking a gander at gross positions instead of just net theoretical positions, which is the more customary approach. We think a more granular look is frequently fundamental. There is a distinction between short-covering, for instance, and new purchasing, however it appears to be identical in the net. Additionally, the gross position is the place the introduction is not the net position. A net position of zero does not mean the market is nonpartisan. Net positions could be huge, which implies a short press or a negative stun could in any case troublesome. The positions that must be balanced are captured in the gross measure not the net figure.

We find numerous customers are likewise keen on theoretical situating in the US Treasuries and oil. The net and gross short theoretical Treasury position has swelled to new records. The bears added 23.8k contracts to the as of now record net short position, lifting it to 616.2k contracts. The bulls attempted to pick a base and added about 20k contracts to the gross long position, which now remains at 471.2k contracts. These modification prompted to a 3.8k contract increment in the net short position to 344.9k contracts.

The bulls delayed in the oil prospects toward the finish of 2016. They exchanged short of what one thousand contracts, leaving 608.1k gross in length contracts. The bears added 4.1k contracts to the gross short position, giving them 168k. These conformities trimmed the net long position by very nearly 5k contracts to 440.1k.

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3 ways to profit in the ‘year of the dollar’

In December, the Federal Reserve raised loan fees for the second time since the Great Recession and included the desire of a 2017 financing cost climb to its gauge. Furthermore, only a couple days prior, the abundantly anticipated minutes from the most recent Fed meeting demonstrated the most hawkish tone from the national bank in two years.

In the meantime, Europe has been dove into political turmoil after a year ago’s Brexit vote and the later abdication of Italy’s leader. Somewhere else, the Bank of Japan proceeds down the way of negative rates and forceful security purchasing.

Put it all together, and it isn’t astounding that the U.S. Dollar Index is up against 14-year highs.

Speculators may have missed so much discussion on account of babble about the Dow Jones Industrial Average at the end of the day almost hitting 20,000. Be that as it may, paying little respect to your assignment to stocks or your venture skyline, this sort of huge picture incline in the dollar implies right now is an ideal opportunity to position your portfolio to benefit and, maybe most critical, to keep away from a portion of the pitfalls that can originate from a solid local cash.

Here are a couple ideas dollar exchanges ought to consider:

Residential plays over multinationals

There’s a considerable measure of seek after shopper stocks in 2017 on account of an enhancing work market and any desires for a jolt under a GOP-controlled Congress and President Donald Trump. In any case, remember that not all retailers are made equivalent especially those with abroad operations that are adversely affected by the wide dissimilarity in monetary standards at this moment.

For example, retailer Wal-Mart Stores Inc.(WMT) said troublesome money trade rates shaved very nearly 2.5% off profit for each partake in the second quarter of 2016. On the other hand consider that in the monetary final quarter of 2016, athletic attire goliath Nike Inc.(NKE) saw its income development cut down the middle because of forex weights, from 12% year-over-year in consistent cash measures to only 6% including real money changes.

To take advantage of the “reflation” exchange that numerous financial specialists are counts on in 2017, you need to represent the headwinds that a solid dollar are making for multinationals at this moment. The most ideal approach to do that is to consider customer plays that do by far most of their business here in the U.S. – for example, Foot Locker Inc.(FL), which has been an uncommon splendid spot in retail throughout the most recent couple of years.

Supported money ETFs

Obviously, in the event that you need a steady portfolio, you can’t just purchase just local centered values. Geographic expansion is similarly as imperative as enhancement crosswise over parts and resource classes. Such a large number of financial specialists keep on holding worldwide plays in light of a legitimate concern for a balanced portfolio, regardless of the possibility that it implies battling a daunting struggle as a result of a solid dollar.

The uplifting news, notwithstanding, is that you don’t need to leave yourself to torment through a solid dollar and a powerless euro when you put resources into Europe. Nor do you need to stress over the yen-dollar conversion standard when you put resources into Japan. That is on account of there’s an entire group of cash supported ETFs to permit financial specialists to put their cash in outside business sectors yet keep away from forex issues.

Consider that Japan’s Nikkei 225 file is up around 25% from its July 2016 lows. The WisdomTree Japan Hedged Equity Fund(DXJ) is up 35% in a similar period on account of assurance from forex issues and a somewhat better-performing rundown of stocks – while the non-supported iShares MSCI Japan ETF(EWJ) is up only 10% in a similar period because of battling a difficult task against a solid dollar.

In the event that you need to differentiate your portfolio comprehensively, you ought to consider supported assets that incorporate the Japan-centered DXJ, the WisdomTree Europe Hedged Equity Fund(HEDJ) to play Europe or the iShares money Hedged MSCI EAFE ETF (HEFA) for developing markets.

Dollar list ETF

In the event that you are searching for an immediate play on a rising dollar as opposed to putting resources into stocks, figuring out how to exchange remote trade can appear like an overwhelming undertaking. Gratefully, there’s the PowerShares DB US Dollar Index Bullish Fund(UUP).

This ETF is attached to the U.S. Dollar Index, which is a measure of the greenback against a wicker container of other worldwide monetary standards including the yen and the euro. It’s a straight money play, however that doesn’t make it straightforward or hazard free. In the event that the dollar debilitates, you’ll lose cash similarly as though you’re putting resources into a stock that has fallen on difficult circumstances. Furthermore, obviously, PowerShares takes a little cut of your speculations en route that indicates 0.8% yearly, or $80 a year on each $10,000 contributed.

Still, in the event that you need to conjecture on the dollar or support against a solid U.S. cash keeping down other worldwide ventures on your rundown, it’s maybe the least demanding approach to do as such for generally financial specialists.

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