Risk Less, Make More: Modifying The Covered Call

The collar trade limits the risk of a covered call position, but most option traders do not truly appreciate the dynamics of a collar or how it can be more effectively employed or managed with synthetic positions.

How do we modify the covered call trade to improve the risk profile? The trading alternatives are numerous. However, one of the first modifications that the average covered call trader will consider is the addition of a long put option to create a collar.

The covered call is a foundational strategy that can be built upon. The trade, as revealed in the first video, is, at its heart, simply a short put. Once you realize that the covered call is equivalent to a short put, you are but one step away from spread trading.

In this second installment of the ChartBender video series, Craig Faassen begins to reveal all of the possibilities and opportunities, which are not readily apparent to the average trader. The revelation relies upon an understanding of synthetic option positions, which was initially addressed in their first video.

ChartBender picks up the discussion of synthetic option positions in this second video and expands upon it tremendously. As we have mentioned, one of the first ways a covered call trader modifies the covered call position is to purchase a put option, creating a position commonly referred to as a “collar.”

In this second video the collar position is dissected, so that you can reproduce it synthetically. One of the great benefits of understanding synthetics is that you can actually become more efficient with your trading. For example, you will learn how to replicate a collar position without the cash or margin requirements associated with owning stock.

You will also begin to see how positions can be broken down, which opens the doors to effective position adjustments.

ARE YOU A CREDIT SPREAD TRADER?

After breaking down the “collar” into it’s synthetic component parts, ChartBender launches into a discussion of “The Box”, a concept that should open your eyes to new ways of managing risk on your credit spread trades. This insight alone can save an active option trader significant sums related to the closing of their spread positions.

As the exploration of synthetics continues to unfold, you will learn how to assume an equivalent position to that of a collar with lower transaction costs and lower capital requirements. If you choose to trade traditional covered call or collar positions, you will still benefit from this discussion because you will learn how to close out your risk in these positions more efficiently.

ONE OPTION SPREAD IS POTENTIALLY MANY

Next on the agenda is the topic of embedded positions, which are synthetic positions inside of your existing positions. Developing an awareness of embedded position gives you the potential opportunity of reducing or eliminating risk in a trade, creating the fabled “free trade” scenario!

With an understanding of synthetics and embedded positions, you will find yourself thinking about your option trading in a manner similar to the way professional option traders perceive their positions in the market.

ASSESSING IMPLIED VOLATILITY

Have you ever questioned whether it was an opportune time to sell a credit spread? Does it make sense to buy a time spread? You will learn how to answer such questions quickly.

A look inside of implied volatility begins with an explanation of what drives this component of the option pricing formula and how you can capitalize upon changes in the implied volatility of an option. To take advantage of IV, you are introduced to the concept of IV profit and loss as a tool to assess when an option position is “cheap” or “expensive” in a relative sense.

ChartBender utilizes cutting edge graphics throughout this video presentation, making these complex concepts quite intuitive. Implied volatility profit and loss data can be graphed, demonstrating visually when an option position is ripe for purchase or sale.

MANAGING A COLLAR POSITION

The fourth part of the video then comes full circle to discuss the management of the collar position. Using synthetics and embedded positions it is possible to whittle away risk and enhance profits by monitoring the position’s IV profit and loss data. Once you master these concepts, you will have elevated your understanding and trading ability to a truly professional level.

WHO IS THIS OPTION TRADING VIDEO FOR?

This second installment in the Risk Less, Make More series is a sophisticated look at options and how they can be traded effectively and efficiently in the market. It took me a couple years to gain this level of understanding.

This video will stimulate the minds of experienced option traders and challenge the understanding of novice traders. This is a video both will want to save and watch several times until all of the lessons are learned.

RECOMMENDATION: YOU WANT THIS OPTION TRADING VIDEO!

A preview of the video is available at no charge, but if you are at all serious about trading options you will want to purchase the full video, which is very reasonably priced.  By following the directions below, you can also obtain an additional discount.

When you register to download the video, take two additional steps and you will receive a discount for being a member of TheOptionClub.com:

• Step One: Go to ChartBender's Education page and click on the "Order Now" button, which you'll find on the left hand column.
• Step Two: Select "TheOptionClub" from the referrer pull-down menu.
• Step Three: Enter "THEOPTIONCLUB" as your promo code.

By doing so you will receive a substantial savings on the price of the module and you will let ChartBender know who referred you, which allows us to continue negotiating additional savings on your behalf.  The same promotional code and referrer identification can be used to purchase the first video in the series for a similar discount. 

Both videos come highly recommended as the first serves as a foundation for the second video, which will open your mind to so many possibilities and provide you with an insight as to how professional option traders see and manage their positions.

ADDITIONAL OPTION TRADING RESOURCES

Review of ChartBender's First Video
The first video, Investigating the
Covered Call, is reviewed in detail

Order The Full Two Video Set
Both videos in the series can be purchased
and downloaded online.  Use our Promo
code and Referrer ID for a discount.