Strategies

Strategies

Covered Call
A financial market transaction where the seller of call options also owns a corresponding amount of the financial instrument which underlies the option, such as shares of a stock or other securities, is known as a Covered Call.

The strategy wherein a trader purhcases the underlying instrument simultaneously with selling the call is commonly known as a “buy-write” strategy. This balancing strategy gives the same payoffs as writing a put option.

The "cover" comes from the long position in the underlying instrument because the buyer of the call can have the shares delivered  if he decides to exercise.

Income from writing a call comes about due to the premium paid by the option buyer. The writer of the call will be able to keep this income as a profit if the price of the stock increases or remains stable, even though the profit may have been higher if no call were written. However, this does not eliminate all risk associated with owning stock and if there is a decline in the price of the stock, then there will likely be a net position of a loss of money.

The price (or premium) paid for a covered call position should be the equivalent to what is paid for the premium of the short put or naked put. This is because in equilibrium the payoffs from a covered call position are the same those for a short put position.

ETFs enjoy high liquidity and because of this their popularity is higher than single-company stocks for writing covered calls.  This is due to the fact that in bad market conditions single-company stocks are seen to be more likely to lose liquidity. Top ETFs, such as QQQ, have very high trading volumes, and because of this they are viewed by investors very good resources for hedging and other risk-mitigating strategies.

Selling Short

Short selling (also called 'going short' or 'shorting') is the procedure of selling assets, typically securities, which were borrowed from some third party (most commonly a broker) with an intention of buying back, at a later date,  identical assets to the lender. It is a type of reverse trading. The reasoning behind this is that a profit can be made if the price of the assets decline between the time the short seller sells the assets and the later time when they repurchase them.  For example, if the asset price at the time of the sale is $100 per share and then at the later date when they are repurchased the price is $85 a share, the short seller sold high ($100 a share) and bought low ($85 a share) for a profit of $15 per share.  The difference here is that the normal sequence of buying shares and selling them later is reversed.

In a less favorable outcome, there will be a loss for the short seller if there is an increase in the price of the assets between the time he sells and the later time when he repurchases.

Other expenses related to short selling can include a payment of any dividends paid on the borrowed assets and a fee for borrowing the assets.

The terms 'going short' and 'shorting' can also be used to describe the action of entering into any derivative or other contract wherein the investor realizes a profit when there is a fall in an asset's value.

Going Long-term

ETFs are exceptional for a long-term investment strategy. They are comprised of a selection of stocks from a variety of companies that make up an index. They bring a portfolio some much needed built-in diversity and follow the major indexes which will allow your portfolio to expand into a specific sector without requiring the purchase of a large number of shares.

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