Wednesday, February 20, 2013

Level 3 options enabled

I have done covered call investing for a while. This is offering someone insurance to buy your stock if it sky rockets... Or offering your seat on a filled airplane... If the plane is full, your seat is worth lots of money... On the other hand, if the plane is relatively empty, you can offer up your seat, but no one will want it.

That's how covered calls work. You own a stock and offer to sell it at a certain price, in exchange you get a small premium for your efforts.

In a similar manner, there is another investment strategy called cash secured puts. It does the exact same thing except you don't own the stock. Instead you offer to buy that stock at a lower price... or insuring the seller in case the stock tanks. Using my plane analogy, you are offering to buy a ticket at a lower price... If the plane is full, you move on and wait for the next flight, but if it had room, you can buy the seat at a lower rate, and get a small premium for your efforts.

Just make sure you want to go to where ever the plane is headed. In like manner, make sure you like the underlying stock you are writing the cash secured put for. In any case, happy investing.

1 comment:

  1. I like your analog. It's a good overview of the situation you're buying into. :-)

    ReplyDelete