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Bull Spreads and Bear Spreads require a directional trading outlook. On an Option Bull Spread you will make a profit only if the stock price rises. On an Option Bear Spread you will make a profit only if the stock falls.
The returns on this strategy can be spectacular if you get the direction and timing right. The bought leg gives you leverage and the sold leg reduces cost and increases your leverage further but at the expense of capping the upside on profits.
An investor writes a call option and buys a put option with the same expiration as a means to hedge a long position in the underlying stock. This strategy combines two other hedging strategies: protective puts and covered call writing.
Usually, the investor will select a call strike above and a long put strike below the starting stock price. There is latitude, but the strike choices will affect the cost of the hedge as well as the protection it provides. These strikes are referred to as the 'floor' and the 'ceiling' of the position, and the stock is 'collared' between the two strikes.
If you own a stock and want to protect that stock's value, then Protective Puts act like an insurance policy on your investment.
Since it will cost you some money to put on this trade, it can put limits on your profits on the stock that you own, but it also protects you if your stock loses value.
A Covered Put Option is the exact opposite of a Covered Call Option.
If you are shorting a stock, and you are neutral to slightly bearish about the stock's potential, then a Covered Put Options Strategy (also known as a Sell-Write) can be a way to receive enhanced premiums, and can also offset some losses if the stock appreciates in value.
If you are buying and holding a stock, and you are neutral to slightly bullish about the stock's upside potential, then a Covered Call Options Strategy (also known as a Buy-Write) can be a way to receive enhanced premiums, and can also offset some losses if the stock declines in value.
Mistakes sabotage every area of our lives, and trading is no exception. The good news is that we can learn from our mistakes. In fact, seeing mistakes as learning opportunities is a popular approach to viewing human error and with good reason. Mistakes provide learning lessons aplenty, although they can be excruciatingly painful to both the psyche and the bank account.