Michael Shulman

2 Types of Bullish Bets

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USE STOCKS AS A SAFETY NET

On the flipside, anytime you decide to short an option, you may want to consider owning the stock as a hedge in case the trade goes against you and you are assigned by the option buyer to provide them with shares of stock at the strike price of the call you initially sold.

For example, a short call paired with long stock is a covered call, which simply says that if your stock is "called" away from you, you literally have it "covered" because you must part with your stock if the call buyer so chooses. The good news there, though, is that you already have the stock and are not scrambling to buy shares just to sell to keep up your end of the bargain.

In the case of short puts, if you wrote a May 20 Put and the stock price dropped to $15 on bad news, not only would your position not be a profitable one for you, but it would instead be profitable to the put buyer (who had "bought to open" that option), who can choose to "put" shares to you at the strike price (or, $20), even though it's $5 per share above the market value. Thus, you would own shares at a higher price than you could turn around and sell them for.

A PREMIUM PLAY

On the other hand, if the stock price remained steady or even spiked, your risk of being assigned would dissipate, as your short put options would be in-the-money and you would be able to keep the premium you had collected when you initiated the trade, along with any profits. And with the long calls, your upside can be unlimited, as an option you purchased for $1 can go up several cents or even several dollars, depending on how much the price of the underlying stock moves.

Although there are risks with any type of options play, you can experiment with different risk/reward strategies and cash flow opportunities to decide the best way to trade that fits the amount of risk you want to take versus the types of profits you want to make.