To go short on stock short selling is used which means you are selling something you technically don’t own. In other words, you “borrow” an asset from the broker, use them as the underlying asset in an options contract, and then return what you borrow at the time the option expires.
Keeping the Account Straight
If the option is exercised and it is necessary to produce stock short sellers will buy the asset or stock and clear the obligation to the broker. In options trading, a margin account refers to a broker account where you only deposit cash equal to a percentage of the value of the underlying asset. You are selling stock that is not fully covered by your account and that is where the borrowing comes into play. The broker is agreeing to hold securities equal to the amount you write an option on.
Covering the Position
The intention is that the stock short sellers use as the underlying asset can be purchased for less than the strike price in the options contract. The risk of loss lies in the fact that the stock price could rise above the strike price forcing the short seller to pay more for the stock than earned on the option. When buying the stock short sellers are said to be covering their positions.
Profit on the sale of stock short sellers receive is net of all transaction costs. Naturally the broker is not going to let you borrow an asset without charging a fee.
Filed under All About Options by on Jun 3rd, 2011. Comment. 
Options trading strategies that rely on selling options are called short options. In the short option you will receive a premium for the option because you are assuming an obligation to take the opposing position of the buyer of the option in terms of the underlying asset price.
Enjoying Some Advantages
Selling options has some advantages that make it one of the popular options trading strategies. One of the most important is the fact that as the option ages, the option appreciates in value because the seller has more premium. As the underlying asset moves out of the money, the extrinsic value or time value grows. In other words, time decay works in the option seller’s favor.
The second main advantage of the options trading strategies that rely on selling options is concerned with volatility. The higher the vega or implied volatility, the more likely the premium price will be inflated. This equates to more money for the option seller.
A third advantage of selling options is that the majority of purchased options are allowed to expire.
Recognizing the Disadvantages
There are some disadvantages to selling options as one of your options trading strategies. One of the most important is the fact a short option has unlimited risk because an asset price can theoretically rise to any price. In addition, the options seller only earns premium.
Because a short call option has unlimited risk, many traders implement spread strategies to put a cap on the risk. Selling puts is less risky because a stock price can only decline to zero. The risk of loss can be managed by hedging with spread options trading strategies.
Filed under Option Trading Strategies by on Jun 10th, 2011. Comment.
The options call or put in calendar spreads refers to creating option positions within the same option contract but there are different expiration dates. The underlying stock and the strike prices are the same. Calendar spreads apply to most option strategies including the bull call and the bear put spreads. In the options call or put purchase in the calendar spread you are creating a long and short position.
Calendar spreads using options call or put are also called horizontal spreads or time spreads.
Call or Put
In the call calendar spread, you can use a variety of strategies but one of the most common is buying the long term call and then, at the same time, writing calls with the same strike price for the same underlying asset but making the second leg at-the-money. You can do the same with puts.
The calendar spread options call or put strategy is called “calendar” because it involves time. In faction expiration of the option contains the most risk in this strategy. The trader wants the near month option to remain neutral and not change so the option simply expires. The option with a later date will retain a higher value because there is less time decay.
Variety of Strategies
The options call and put calendar spreads can be used in different markets including the bull and neutral markets. It is a versatile strategy that options traders should become familiar with and use regularly. It is easy to learn too which means novice traders can use it too.
Filed under Option Trading Strategies by on Jun 17th, 2011. Comment.