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Many investors in the stock market remain very skeptical of using options to their advantage simply because of what they read about in the popular press. They hear about the rampant speculation that occurs in the options market, the fact that most options contracts expire worthless, and so on. However, I believe even the most conservative of investors can find options helpful in one way or another. In a series of three posts I hope to expose you to my favorite options strategies:
  • Cash-secured put
  • Covered calls
  • Put/Call credit spread
Cash-secured put

Cash-secured puts are rather simple to understand. Basically, it's the sale of a put with the cash needed if the put finishes in the money readily accessible. For those unfamiliar with puts, they are the right to sell stock to someone at a given price at a given time. For example, if I buy $450 puts on Google (NASDAQ: GOOG), I can later sell Google stock to the seller of the options contract at $450 when the put expires. If Google stock is below $450 at that time, say $400, I just made a $50 profit per stock. The seller of the contract, on the other hand, is forced to buy the stock at $450, as he or she loses $50 per stock. That means that buyers of puts are bearish on a given stock while sellers of puts tend to be bullish.

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Strategy Session: Cash-secured puts originally appeared on BloggingStocks on Fri, 20 Jul 2007 15:00:00 EST. Please see our terms for use of feeds.

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