Wait! You mean we can't just make stuff up as we go along? Crap... I'm going to have to revisit my whole strategy now. P.S. I'm pretty sure it was a unicorn, not a pony.
Oh sorry @MathTeacher, I made a typo where I said "Buying a straddle involves buying a call + selling a call", I meant "buying a call + buying a put". Hope you saw that it was a typo because I went on to state that
It's an insurance policy with capped claims. This is how you would need to think your covered call strategy as because when god forbid your stock goes down, you are only protected up until the premium that you have earned on the short call minus even the commission.
Yes. It would help you to see this by drawing what's called a payoff diagram such as this: https://www2.poems.in.th/home/derivatives/en/options04.htm#:~:text=A Payoff diagram is a,options involved in the strategy. You draw all of your strategies even your long stock investment on the diagram and then you can see how the strategy evolves at different prices. Here is the payoff diagram for long stock+ long put i.e. a synthetic call. https://www.investopedia.com/terms/s/synthetic_call.asp. It's called a synthetic call because it's a call that's produced by several different strategies combined, i.e. "synthesized" by different strategies vs. buying a call outright. You can see the strike price of the synthetic call is exactly equal to the strike price of the put which is also the break-even point of the two strategies combined, the synthetic call. It's really helpful to draw payoff diagrams of your strategies then you can have a clearer picture of how your strategies work in different price scenarios and it helps you to plan and create the most optimum strategy(ies) for your profit goal while being mindful of your risk tolerance or drawdown limit.
lol now MsDawn has edited this garbage to read, “capped claims.” MsDawn, in what other ways can you synthesize a long call?
I agree. Keep everything simple. All what options are is probabilities within a time limit. What's the probability that a particular strike(s) will be hit or not be hit by a certain time and how much I will make or lose when this(these) strike(s) is(are) hit or not be hit within that time frame. That's why I feel payout diagrams are really helpful because they really help you see what @taowave is saying above. Analyze options trades from a profitability point of view keeping in mind their probabilities.
MT, sounds like you are mighty familiar with XOM. In the past, how has XOM stock price moved relative to a 10% drop in crude oil price? Maybe the wife would like to take a $100.00 flyer on OILD, lol https://stockcharts.com/h-sc/ui?s=OILD
MsDawn: options are probabilities. Cocaine is a drug -> aspirin is a drug -> therefore cocaine is aspirin.