Options Talk - Episode 22 - plain shares versus combo with options

Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks.

Introducing episode 22 - plain shares vs combo with options

"Episode 22 - plain shares vs combo with options" provides a detailed comparison of two investment strategies: buying plain shares versus combining shares with selling options premiums. Koen and Peter delve into the practicalities and outcomes of each approach, offering insights to help traders make informed decisions.

Understanding the use case

• Comparison setup: Evaluating the outcome of buying 300 shares of a stock versus buying 200 shares and selling a straddle.
• Focus: Stocks with high option premiums due to high volatility.

Key definitions

• Straddle: Selling both a call and a put option with the same expiry date and strike price.
• Bullish view: Assuming the stock price will increase.

Scenarios and outcomes

• Scenario 1 - Stock increases to $25:
  • Buying 300 shares: Higher profit due to direct stock ownership.
  • Combo strategy: Slightly less profit but involves less initial investment.
• Scenario 2 - Stock stays at $20:
  • Buying 300 shares: No profit or loss.
  • Combo strategy: Profit from the premium received by selling the straddle.
• Scenario 3 - Stock drops to $15:
  • Buying 300 shares: Significant loss.
  • Combo strategy: Reduced loss due to the premium buffer from selling the straddle.
• Break-even scenario: Calculated at $17.34, where the combo strategy neither gains nor loses.

Extreme scenarios

• Stock doubles to $40: Buying 300 shares is more profitable.
• Stock halves to $10: Combo strategy results in a lower loss compared to owning the stock outright.

Conclusion

• Advantages of combo strategy:
  • Provides a buffer against losses with the premium received.
  • Profitable in sideways or slightly downward moving markets.
  • Requires lower initial investment compared to buying all shares.
• Advantages of buying shares:
  • Higher profit potential in a strongly bullish scenario.

Practical advice

• Consider using options: Enhance returns and manage risk by incorporating options into your strategy.
• Evaluate volatility and premiums: Assess the stock's volatility and option premiums before deciding on a strategy.
• Benefit in uncertain markets: The combo strategy is particularly beneficial in uncertain or moderately bullish markets.

Why listen to episode 22? For traders and investors looking to refine their investment strategies, Episode 22 of 'Saxo Options Talk' is essential. Packed with practical advice and expert insights, this episode will help you navigate the complexities of combining shares and options to optimize your returns.

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Your questions, our answers

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Conclusion:

"Episode 22 - plain shares vs combo with options" equips traders with the knowledge to make strategic decisions when combining shares and options. Koen and Peter’s expert insights and practical tips provide a comprehensive guide to understanding the benefits and risks of each approach. Tune in to transform your trading strategies and maximize your investment potential with these expert strategies.