Option Plays

Hi Shoppers,


So, you’ve made a decision to go long in a stock.


It costs a lot of money to buy the stock outright, right?


That’s why we have options.


Using the options, there are three ways to get long: buy calls, sell puts, or buy calls AND sell puts.


Buying calls outright, you are putting out money and all you can lose is what you paid for the calls.


Selling puts outright, you are at risk of getting long the stock, if it trades below your short put …


Or you can sell a put spread and your risk is the width of the spread less the money you collected.


Buying calls and selling puts of the same strike is synthetically being long the stock.


Buying an out-of-the-money call and selling an out-of-the-money put is called a “risk reversal.”


You are getting long but reducing your outlay, or price, by selling the put against the price of the call.


So, you make money on the upside and your risk is the stock closing below your short put.


How do you choose which strategy to use in all of that?


Read on!


Hip to Be Square


I am seeing what could turn out to be a beautiful doji in Square (Ticker:  SQ):



If SQ opens and trades higher today, I would like to get long.


What’s the best way to do that?


Let’s take a look at the call vertical:



The Dec. 10 at-the-money call strike is 192.50 and going out 10 points to the 202.50 calls, the spread market is $3.17-3.96.


That’s a bit wide and a bit rich.


Looking at the Dec. 10 puts:



I would sell the 170 puts and buy the 150 for around $.80.


As for the risk reversal, I would have to spend quite a bit to get anywhere near the at-the-money calls.


For instance, buying the 195 calls and selling the 170 puts would cost around $4.20.


Therefore, my choice for getting long SQ today, if it opens up and trades higher, would be to sell the 170/150 put spread and collect $.80.


I will take my profits and buy it in when it trades down to $.20-$.25. I will take my loss if the stock trades down and the spread trades near $1.05.


Any of these plays will work as long as the stock trades higher.


It is a matter of finding the most edge, knowing what you are comfortable with and sticking to your trading plan.


Thanks for Reading … See You Next Tuesday!


Licia Leslie

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