He can sell a covered call. Now, don't assume your question will use the word "sideways," as if that is some scientific term. It will let you know in some subtle, roundabout way that the stock is expected to go, like, nowhere, so why not collect call premiums rather than just sit around doing nothing?
If an investor expects the stock to sit perfectly still over the next few weeks or months, his maximum, gutsy play would be to write a straddle. I mean, if the stock really goes nowhere, both the writer of a call and the writer of a put would profit; therefore, why not be BOTH the writer of a call and the writer of a put with the same strike price? On the other hand, one only buys a straddle if he feels the stock will surely move big-time in either direction. Buyers of options need MOVEMENT, so if the question implies that the individual feels the stock might not move, that person is a SELLER of options. If you BUY an option, the stock always has to move, and by more than the premium you just paid to get in. This is true of buying single calls and puts, buying straddles, and establishing debit spreads--all are BUYERS, all need movement from the underlying instrument. If you think the market might sit still or work against the buyer, you sell calls and puts, sell straddles, or establish credit spreads. Suitability Questions in ExamCram Online
My instructor at the live class said they only ask about BULL spreads, never BEAR spreads. Also, they are MUCH more likely to ask about debit spreads than credit spreads . . . ?
ReplyDeleteWell . . . I'm glad there is an industry space that allows guys like him to eat, buy clothes, rent a decent apartment, etc. I'm just sorry you paid money and spent time listening to such nonsense. No one knows what's on the exam specifically; EVERYONE knows what's on the outline, and everyone knows what exam questions look like to some degree. There are no tricks; there is no insider information that will help anyone beat the exam. Only way to beat the exam is the study like your career depends on it.
ReplyDeleteTO study like your career depends on it, that is.
ReplyDeleteNOTE: expect to IDENTIFY bull vs. bear spreads, credit vs. debit spreads. The questions will have you recommend particular options strategies--write the covered call, buy the protective put, sell the straddle, etc.
ReplyDeleteAnd, as with all of the investment vehicles, know the basic vocabulary and a brief bullet list of FEATURES and RISKS. Also TAX IMPLICATIONS.
ReplyDeleteSo, like my instructor said, if you buy the lower strike price, it's a debit spread?
ReplyDeleteI'm betting he did NOT, in fact, say that. No offense, but I'm betting that you were only able to remember so much of the banter that occurred over a merciless four- or five-day stretch. If you buy the lower strike price, you establish a BULL spread--always. That's for call and put spreads. If you buy the Oct 50 and sell the Oct 55, you have a BULL spread, whether those are calls or puts. BUT .. . for the debit vs credit thingie--you have to walk through it. If he pays more $, it's a DEBIT spread; if he receives more $, it's a CREDIT spread.
ReplyDeleteYEAH, but if they don't give the friggen PREMIUMS, how the FUCK am I supposed to know whether he paid more $ or received more $?
ReplyDeleteI see you're from Brooklyn. Okay, let's say that Adrianna bought an ABC Apr 40 call and sold an ABC Apr 45 call. Is that a BULL or BEAR spread? She bought the lower strike price, so she's BULL-ish. Now, which option is worth more to the marketplace--the right to buy ABC for $40 or the right to buy it for $45?
ReplyDeleteWhat the hell you mean "the right to buy at $45"? She doesn't HAVE the friggen RIGHT to BUY at $45!!!
ReplyDeleteThe OPTION gives SOMEONE the right to buy the stock for $45. The other option gives SOMEONE the right to buy the stock for $40. Which OPTION is more valuable? The right to buy stock for $40 or for $45?
ReplyDeleteHoly shit--you're awesome! You look pretty good, too--where are you out of?
ReplyDeleteGlad I could help. Good luck with your exam.
ReplyDeleteYou tryin' to blow me off? You think you better than me?
ReplyDeleteAnyway, thanks for your help, Mr. Walker!
ReplyDeleteNo problem. Thanks for the photos, too, btw.
ReplyDeleteBTW, if Adrianna buys the Apr 40 call, she pays more money for that option than she takes in when she sells someone the right to buy the stock for the higher price of $45. However, for puts, the Apr 45 put is worth MORE than an Apr 40 put. A put option is the right to SELL stock. Buy low--sell high, people.
ReplyDeleteSince we're having so much fun here, see if you can determine if the following is a bull or bear spread, a credit or debit spread:
ReplyDeleteBuy 1 XYZ Sep 55 put
Sell 1 XYZ Sep 50 put
Holy shit--I think I friggen got this one. She's BEARISH because she did NOT buy the lower strike price. And . . . this is a DEBIT spread, because the option she bought is worth more to the market. The right to sell XYZ for 55 is worth more than the right to sell it for $50. You rock, Mr. R Walker. We should kick it sometime--you could like tutor me and stuff. LOL.
ReplyDeleteTutoring is done online, and, in your case, we may have to block all webcams.
ReplyDeleteLOL! :)
ReplyDeletecome by and teach me about straddles and spreads, Big Boy . .. LOL!!!
ReplyDelete