Level 1 - Write covered calls. When you own a stock (like CPQ) which is down and might languish for a few months, but you don't want to sell it, you can improve your profitability by selling calls equal in shares to what you own. You might pocket $2.00/share or more. If the stock is still under the strike price of the call at expiration, the buyer of the call is out of luck and you keep the premium they paid. Worst case is the stock goes up and they "call" it away from you. You still keep the $2.00. You can always buy the stock right back, but you miss out on any gain above the strike price.
Level 2 In addition to the above, you can speculate in buying Calls/Puts. I believe a "Covered Put" is for when you are short a stock and think it won't go down for awhile so you sell a Put. If it does go down, the buyer of the Put will "put" the stock to you, effectively closing your short. (Similar to when you're long a stock but don't think it will go up, so you sell a Call.)
Level 3 In addition to Level 2, you can write Puts when you are NOT short the stock. (Dangerous!) You might have to buy a stock at a price way above market. For this, you have to have lots of $$$ in your account. Spreads, straddles, etc. are combinations of options. For example, you might buy both a Put and a Call on the same issue. If the stock hasn't moved at expiration, you lose on both. If it goes way up, the Call wins, the Put is worthless. |
