Randy Frederick

Trading Options for Retirement -- Part Two

by Randy Frederick   08/08/08

Free Trading Guides

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This is a continuation from "Part One" of a three-part series.

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Covered Call Ctd.

It's rarely a good idea to sell a covered option if your stock position has already moved significantly against you. Doing so could cause you to establish a selling price that ensures a loss. To avoid locking in a losing trade, before you sell a covered call, always ask yourself the question, "Would I be happy if I had to close out my stock position at the strike price on this option?" If you can answer yes to this question, you will probably be OK.

Remember, if your short option is in-the-money, you can be assigned at any time. This is especially common on the day right before the ex-dividend date and anytime during the week of option expiration.

The Collar (Long Stock, Long Puts & Short Calls In Equal Quantity)

This is a strategy that combines a covered call and a protective put. Consider establishing a collar if you are primarily concerned with protecting a position at minimal expense. A collar provides temporary protection against a downturn in the equity position, but also removes most of the upside potential.

Since it's generally unwise to hold a long stock position if you think the long-term prospects are poor, you should only consider employing this strategy if you feel the long-term prospects of your stock are still favorable.