Using Options to Boost Income in a Stock Portfolio
We can broadly divide options trading strategies into two very distinct camps:
- Directional or speculative strategies
- Nondirectional or delta-neutral strategies
The two strategies we will discuss in this chapter, covered calls and selling naked puts, are both a bit of a hybrid between directional and nondirectional strategies. The covered call strategy can be used to boost the income from your stock holdings while the market is slightly bullish or trading sideways. But if your opinion of the market’s future direction is bearish, the covered call is not the appropriate strategy.
We can use the selling naked puts strategy to either generate income or build a stock position at a discount. But selling naked puts depends on a bullish market trend or, at a minimum, a sideways trend.
Chapters 6, 7, and 8 will concentrate on nondirectional or delta-neutral options trading strategies. Some will argue that the delta-neutral strategy also requires a market prediction, namely, a prediction of a sideways market. But I maintain that a delta-neutral options strategy does not require the trader to predict a sideways market trend if he knows how to adjust his position for a strongly trending market. Then the trader can play the delta-neutral strategy every month. He will profit in the months where the market either trades sideways or trends slowly; he will take small losses or break even when the market trends strongly against his positions. ...