Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
The Beatings Will Continue Until the Economy Improves - 6th Jul 20
The Corona Economic Depression Is Here - 6th Jul 20
Stock Market Short-term Peaking - 6th Jul 20
Gold’s Major Reversal to Create the “Handle” - 5th July 20
Gold Market Manipulation And The Federal Reserve - 5th July 20
Overclockers UK Custom Build PC Review - 1. Ordering / Stock Issues - 5th July 20
How to Bond With Your Budgie / Parakeet With Morning Song and Dance - 5th July 20
Silver Price Trend Forecast Summer 2020 - 3rd Jul 20
Silver Market Is at a Critical Juncture - 3rd Jul 20
Gold Stocks Breakout Not Confirmed Yet - 3rd Jul 20
Coronavirus Strikes Back. But Force Is Strong With Gold - 3rd Jul 20
Stock Market Russell 2000 Gaps Present Real Targets - 3rd Jul 20
Johnson & Johnson (JNJ) Big Pharma Stock for Machine Learning Life Extension Investing - 2nd Jul 20
All Eyes on Markets to Get a Refreshed Outlook - 2nd Jul 20
The Darkening Clouds on the Stock Market S&P 500 Horizon - 2nd Jul 20
US Fourth Turning Reaches Boiling Point as America Bends its Knee - 2nd Jul 20
After 2nd Quarter Economic Carnage, the Quest for Philippine Recovery - 2nd Jul 20
Gold Completes Another Washout Rotation – Here We Go - 2nd Jul 20
Roosevelt 2.0 and ‘here, hold my beer' - 2nd Jul 20
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20
U.S. Long Bond: Let's Review the "Upward Point of Exhaustion" - 27th Jun 20
Gold, Copper and Silver are Must-own Metals - 27th Jun 20
Why People Have Always Held Gold - 27th Jun 20
Crude Oil Price Meets Key Resistance - 27th Jun 20
INTEL x86 Chip Giant Stock Targets Artificial Intelligence and Quantum Computing for 2020's Growth - 25th Jun 20
Gold’s Long-term Turning Point is Here - 25th Jun 20
Hainan’s ASEAN Future and Dark Clouds Over Hong Kong - 25th Jun 20
Silver Price Trend Analysis - 24th Jun 20
A Stealth Stocks Double Dip or Bear Market Has Started - 24th Jun 20
Trillion-dollar US infrastructure plan will draw in plenty of metal - 24th Jun 20
WARNING: The U.S. Banking System ISN’T as Strong as Advertised - 24th Jun 20
All That Glitters When the World Jitters is Probably Gold - 24th Jun 20
Making Sense of Crude Oil Price Narrow Trading Range - 23rd Jun 20
Elon Musk Mocks Nikola Motors as “Dumb.” Is He Right? - 23rd Jun 20
MICROSOFT Transforming from PC Software to Cloud Services AI, Deep Learning Giant - 23rd Jun 20
Stock Market Decline Resumes - 22nd Jun 20
Excellent Silver Seasonal Buying Opportunity Lies Directly Ahead - 22nd Jun 20
Where is the US Dollar trend headed ? - 22nd Jun 20
Most Shoppers have Stopped Following Supermarket Arrows, is Coughing the New Racism? - 22nd Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

How to Profit as Stock Prices Plummet - High Risk, High Return

InvestorEducation / Options & Warrants May 02, 2013 - 09:23 AM GMT

By: DailyGainsLetter

InvestorEducation

Moe Zulfiqar writes: It’s not uncommon for a company to get in trouble and suffer for many quarters, or even years, before there are some improvements. As a result, when a company’s conditions deteriorate, the stock prices follow in the same direction—they decline.


There are many examples of companies that got into a downward spiral and their stock prices plummeted over time—consider companies like Blackberry (NASDAQ/BBRY), formerly Research in Motion Limited, losing its market share to competitors, and Bank of America Corporation (NYSE/BAC) being heavily involved in mortgages during the housing slump.

One way investors can take advantage of this situation is by shorting the stock—betting that the stock will continue to go down. Unfortunately, to do so, they will have to meet their broker’s initial margin requirement and so on and so forth.

Instead of shorting a stock, investors can make use of an option strategy called the “naked call.” By employing this strategy, investors can also generate income for their portfolio.

Essentially, a naked call is a bearish option strategy in which an investor sells/writes a call option without owning the underlying security. As a result, the investor receives the premium selling price of the option and promises to provide stock if the price reaches a certain strike price. Keep in mind, this option strategy should not be confused with a covered call—they both have very different characteristics, risks, and rewards.

How does a naked call work?

Suppose that stock of ABC Inc. is trading at $20.00, but the investor believes it will continue to decline. Instead of shorting the stock, he writes/sells call options expiring in May for $2.50 per share, with a strike price of $25.50. By doing this, the investor will receive $250.00.

On the expiration date, if the stock stays below $25.50, then the investor will take the $250.00 and that will be his or her maximum profit. In contrast, if the stock goes higher, the investor will be forced to buy the underlying security and sell it to the call option buyer at a loss.

With all this said, before adding this option strategy to your income-generating arsenal and taking advantage of the downside, investors should know that it is a very risky strategy, to say the very least. Just like shorting, when employing a naked call strategy, investors can run into deep trouble—their losses can be significant.

Going back to our example above, if, unexpectedly, shares of ABC Inc. go to $35.00, the investor will be forced to buy shares for $3,500.00 plus commission. Even after getting $250.00, the investor will face a loss of $700.00. This is because, as per the call option they wrote/sold for a strike price of $25.50, the investor will have to meet the conditions.
While this investment strategy shouldn’t be used by investors who are trying to protect their capital or those who are closing in on their retirement, if one does employ a naked call strategy, they should at least have some sort of loss control in place. This can be done by buying back the call option they wrote or even buying the stock as they see stock prices climb, so their losses won’t be as bad.

Source:http://www.dailygainsletter.com/investment-strategy/hi...

Copyright © 2013 Daily Gains Letter – All Rights Reserved

Bio: The Daily Gains Letter provides independent and unbiased research. Our goal at the Daily Gains Letter is to provide our readership with personal wealth guidance, money management and investment strategies to help our readers make more money from their investments.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules