"How to use PUTs and CALLs to Minimize Risk and Increase Profit on Each Buy and Sell"
Written by John DeCamp Sat. 6/1/2013 - 4:39PM.
Here is how I use Options (PUT's and CALL's) to help make more money off some of the stocks I buy and sell while still minimizing the risk to me.

a PUT is a promise to BUY a stock you DO NOT own at a specified price (strike price) up until a specified date (expiration date.)

a CALL is a promise to SELL a stock you DO own at a specified price (strike price) up until a specified date (expiration date.)

Both PUT and CALL options require the person who buys the option from you to pay the option purchase price (Premium) in order to have the right to make you buy (PUT) or sell (CALL) the stock prior to the expiration date. Option prices go up and down along with the price of the stock, but also are hugely affected by the underlying emotional feeling the stock market has about each individual stock.

I always check on selling a PUT option when I have identified a stock that I want to buy and have defined my buy price. Before placing a BUY order, I check the Option prices at Yahoo Finance "Options" tab, to see if the PUT option price is at about 10% of the strike price at the same stock price that I am willing to buy at. That means I can sell a Cash Secured PUT at a strike price which is the same price I was already willing to buy the stock at, and make an immediate 10% more and I may never have to buy the stock at all if it ends above the strike price at the option expiration date.

Then I do the same thing with a stock that has reached my sell price target. I check the Option prices at Yahoo to see if the CALL option price is about 10% above the price I am willing to sell at. That means I can sell a Covered CALL at at a strike price which is the same price I was already willing to sell the stock at, and make an immediate 10% more and I may never have to sell my stock if it ends below the strike price at the option expiration date.

Yes, the PUT still leaves me open to taking a big loss if the stock continues to drop after I sell the PUT. But, since I only sell a PUT when I have already decided I want to buy a stock at a certain price, I have now made a built in 10% cushion if the stock drops any more. Remember that I am always happy to make "only" 10% on each of my stock trades. About half the time I do not get the stock PUT to me and the PUT expires worthless, so I made my goal of 10% return and never had to buy the stock. But, if it drops even lower and I get the stock PUT to me, then I am willing to wait for it to come back because I had already used my Stock Evaluator spreadsheet to check for RED cells before I ever considered buying it, and I am confident that it will not go bankrupt while I wait for it to come back. Only problem is that sometimes I have had to wait for over a year for a stock to come back enough to make my 10% goal.

Patience is very important.

You will need to get your brokerage account approved to sell "Covered CALLs" and "Cash Secured PUTs". This required a few forms at my broker that I had to complete, and then my cash brokerage accounts and my IRA brokerage accounts were approved for selling PUTs and CALLs.

Click to Download our CALL & PUT Calculator Spreadsheet

Click for Free Optionistics.com Screener for Stock Options

Screenshot of Starting Parameters for CALLs to Use with Optionistics sreener

Screenshot of Starting Parameters for PUTs to Use with Optionistics screener

John DeCamp is founder, chief market analyst and webmaster of Ultimate Stock Finder.


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