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Strategies & Market Trends : The Options Box
QQQ 629.07+0.5%Oct 31 5:00 PM EST
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To: farmersue who wrote (10774)5/9/2001 7:16:09 AM
From: Poet   of 10876
 
Hi farmersue,

That's a great question.You certainly could buy long term (lets say LEAPs) puts and calls on the same security, but the premiums would set you back a significant amount of money. Sometimes people use a strategy similar to this (buy the same-strike put and call on a single equity) if they feel the stock is poised to break out in one direction or the other, but are unsure as to which direction it will go. Front-month calls (the current month) are used for this.

You might try writing covered calls if you have purchased a stock and feel that it's about to roll over. Let's say you own JNPR. JNPR closed yesterday at $58.90. The Nasdaq has been toppy and futures are down. You decide to protect yourself on the downside. You could "sell to open" one contract of the JNPR May 60 calls (JUXEL) at approximately $4.20, or $420 per each 100 shares you own.

These call expire next Friday. If JNPR closes under $60 at next Friday's close, you keep the total premium you received for selling the calls, which reduces your cost basis per share by $4.20.

You can trade in and out of these as well. You don't have to let them expire worthless. And since you're selling these optionsrather than buying, you won't run into margin problems.

Let me know if you have any more questions and I appreciate your contribution.
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