Strategy Summary

High Level Concept:

1. Choose a stock that research indicates that it may remain steady of go up, implying that it is NOT bearish.
2. Then choose two strike price with a SPREAD of few dollars (maximum $5) that is deep in the money by 10% to 15%.
3. Then you SELL a PUT at or near money (the higher strike price).
4. Next, you BUY a PUT using the lower strike price.
5. You pocket the difference in the premium that you receive between the 2 strike prices.

Example:

1. OIH is trading at 190
2. You choose to SELL a PUT with Strike Price = 175 & get a premium of $1.40
3. Now, you BUY a PUT with Strike Price = 170 & it costs you a premium of $0.90
4. You pocket the difference in the premiums of $1.40 - $0.90 = $0.50 (this is the credit per share)
5. Note: Trading is conducted in contracts, each contract = 100 shares. Also, we will not take into account the commissions, which are generally quite low (generally $25 for the trade).
6. If you buy & sell 10 contracts, you get a credit of $0.50x1000 = $500.00.
7. So in the above example for 10 contracts (1000 shares):
   Selling PUTs credits $1.40x1000 = $1400.00
   Buying PUTs debits $0.90x1000= $900.00
   Net Credit = 1400.00 – 900.00 = 500.00
8. If the stock remains above 175, do nothing, you keep the $500.00
9. It is recommended that if it reaches below 175 then, monitor, & definitely close the position. You do not want to be assigned the stock.

Margin, Risk, & Additional Notes:

1. Margin requirement is the difference between the strike prices times the # of shares.
2. The maximum profit is the net credit (difference in premiums). $500 in this example.
3. Maximum risk is the difference between the strike prices, less the net credit (difference in premiums). Here, maximum risk is $4500.
4. The above is calculated: 1000 shares x 5 spread = $5000 is your investment. Credit received = $500. So the worst case scenario is losing $5000 - $500 = $4500
5. You therefore receive a roundfigure 10% return w/o taking into accout commissions. Or let us round off to 9% if you account for commissions. This is for a duration of 40 - 60 days max. Not bad, if you can repeat & roll such strategy every month.
6. This is a limited risk & limited income strategy.
7. Your break-even point is the higher strike price (#1) minus the net credit.
8. In above example the break-even is at 175.00 - 0.50 = $174.50.
9. So you are not at a loss as long as the stock price remains above this number.
10. You choose the right stock + the trend is bullish, as well as "Deep In The Money"

A few words on what to choose? Here, in the example, we chose OIH. That is related to the Oil & Exploration industry, is an ETF. It is safer to choose ETFs or an equity in a strong industry (as in this example). Also, on epointto note i sthat an ETF is not directly dependent on earnings calendar when compared to individual stocks which may get beaten up when earnings are reported. In simple words, choosing ETFs is comparitively safer.

Bottom line, investing in options is not for everyone & there are risks involved. Options expire, you can lose the entire investment if the stock/ETF goes down substantially or crashes. Research & study details prior to investing in any form. Do your homework, consult an expert &/or someone who is very familiar with investing in options.