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The first of a two part look at Covered Call Writing. In this first part, we start with the basics. When you embark upon your first adventure into options trading, there are those who will tell you that "covered call writing" is the safest strategy. Even brokerage firms allow novice option traders to trade covered calls in their IRA accounts. Little do they know. Or, if they really do know, little do they care. Once upon a time there was an investor. All of his life he was taught that, if you buy a stock and hold onto it forever, the stock will go up, you make a lot of money and live happily ever after. It's the American dream. As we've come to learn, those dreams and Mother Goose have a lot in common. They're fairytales. The harsh...

Stock indices futures are known for their volatility, however trading index options may be a more manageable alternative for the average trader. Highly leveraged futures contracts are available in all of the major indices. Perhaps the most popular being the Dow, Nasdaq and S&P 500. Similar to mutual funds, trading indices offer stock traders instant diversity. Traders can profit from an increase or decrease in the overall equity market as opposed to trying to pick individual stocks. However, the volatility and leverage involved with stock index futures prove to be unmanageable for many traders. For this reason, traders may find that options are the ideal instrument for index trading. Range Trading Because the stock market can be...

What is gamma? An option's price changes with fluctuations in several factors such as spot price, volatility, interest rates and time. Delta is a measure of the change in option premium with respect to a change in the underlying, or spot, price. Gamma represents the change in delta for a given change in the spot rate. In trading terms, players become long gamma when they buy standard puts or calls, and short gamma when they sell them. When commentators speak of the entire market being long or short gamma, they usually are referring to market-makers in the interbank market. How market makers view gamma Let's consider how market makers view gamma. Generally, options market makers seek to be delta-neutral - that is, they want to...

Anyone who has studied options knows that there are six basic factors that make up the price of an option. They are, the price of the underlying, strike price, days until expiration, dividends, interest rate and volatility. I thought this might be a good time to review all of these factors and how they influence an individual options price. I am choosing to do this review in more of a straight forward way rather then a purely mathematical way. There are many excellent books that use great mathematical models in explaining options, but I believe that for terms of a review we can look at some real life examples and learn from those situations. The purpose of this review is to help you to make better decisions on which options to...

Imagine how much money you could have made had you sold every option that you have ever purchased? While many traders boast of huge profits attained from a singe long option play, these stories are rare in comparison to those in which traders have lost some, or all, of the premium paid for an option. In a sense, option buyers are throwing good money after bad in hunt of that one big market move that could return extraordinary profits. Given the fact that markets spend most of their time trading in a range, it is easy to see why few traders experience the abnormal returns that drew them to the markets in the first place. A less exciting, but more fundamentally sound approach would be to attempt to profit from markets that are trading...

Casinos bring in gaming revenue confident that over time they will collect more than they will pay out in winnings. They know that even though there are jackpots to be paid, the odds are in favor of the house. Similarly, insurance companies collect premium with the expectation of future payouts. By knowing the probability of a claim, they can calculate their expected return for assuming the risk of the policyholder. The insurer is confident that, over time, they will profit despite their obligation to pay claims. Option traders can benefit from the same logic by selling credit spreads. This strategy gives them the ability to capitalize on probabilities, as opposed to entering a position hoping to profit on a "long shot", as well as...