A Thoughtful Response to Speculative Options Traders

I hope my readers have noticed that I do not endeavor to speculate on how you can make a ton of money if the stock goes in a certain direction and if the market does so-and-so if you theoretically bought a call and the stock soared, or bought a put and the stock took a dive. I don’t use naked calls and naked puts in my safe reliable strategy, only covered calls, and rarely covered puts when I want to purchase 100 shares of a stock and hold it indefinitely.

My strategy is basically one of building a strong hedge. My 10% Head-start on the market through my employer-provided ESPP, is a hedge. The premium I take by selling a covered call, is a hedge. I protect myself from losses, and if the market goes in my favor, then I make a profit. So far, I have made great profits.

It’s interesting that the more “aggressive” you become with selling covered calls, the more you are giving up by choosing a lower strike price. It creates its own balance. The only way to be more aggressive would be to buy calls or puts and actually bet your own cash on the direction of the stock and risk losing it all.

Through selling covered calls and puts you have limited risk, and that risk is limited to the quality and volatility of the company you’re investing in, minus the premium that you received on the sale. A side-note to keep in mind – the amount of premium that you are able to receive is directly proportional to the volatility of the stock; the higher the volatility, the higher the premium that you receive. This is mostly really great because a higher volatility stock is probably that high growth company that you are really excited about and with the higher premium you get a greater hedge built-in to mitigate that extra risk.

These are my explanations to people that try to explain how they (I) could make a ton of money if they (I) bought leveraged calls and puts on margin and the stock moved in the direction that they (I) KNEW it was going to move in. YOU DONT KNOW! So don’t take the bet.

Thanks for reading. Comment, Contact, and Tweet.

–KEN

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