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So our total initial investment is the sum of both premiums, which is $3.75. This provides you with the option premium while your maximum risk is strike price of the option minus the premium received. After all, if that was possible, how could anyone ever lose any money in the market? And if nobody loses, then how can someone else gain? The whole stock market would collapse. 1) Short Straddle: This strategy is implemented by simultaneously writing a put and a call option on the same stock with the same strike price and the same expiration date. The investor wants some limited upside protection from shorting the stock which comes from receiving the put premium. When an investor is less bearish the strike prices used should be closer to the current market price of the stock and the strike prices should be closer together. 2) Short Combination (Short Strangle): This strategy is similar to the Short Straddle as you write a call and a put option; however, the difference is that with a short combination you use different strike prices. As you can see, the buy-write strategy can be altered to fit anydirectional view you have on your selected stock. This means that at any given moment in time, you might have adifferent opinion of the potential movement of that stock.Knowing this, there is a way to address your present level ofconfidence or lean. Instead of shorting Google (GOOG) you decide to buy put options on Google (GOOG) because you dont want to put so much money at risk. However, you need to consider other aspects of the options price like volatility. If theoption is going to expire in-the-money and you want to keep thestock you will need to buy the short option back and sell thenext months call. Now, the most you can loose over the month is the $1 you paid for the put while can still participate in any decrease in the stock price. In those rarecases, you will not want to roll the position, because itmight be called away if the call you sold is exercised when itbecomes in the money. How to choose the Strike Price?The strike prices used will depend on how bearish an investor is. A more advanced investor can tweak Straddles to create many variations. Picking a stock or group of stocks is only half the battle. When is it used?Call option writing is used by investors to generate additional income. This is the price where a stock price must go above (for calls) or go below (for puts) before a position can be exercised for a profit. The premium receivedwill offset the loss due to the fact that you identified andadjusted for a likely move. There are two types of option contracts - Call options and Put options. This provides you with the option premium while your maximum risk is strike price of the option minus the premium received. As long as the price of Apple (AAPL) is less than (120 + 5 = $125) at expiration, you have made a profit. The Bear Call Spread is implemented by buying a put option while simultaneously writing a put option with a lower strike price.
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