Schedule of activities

Day 1 Traditional uses of puts and calls


A description of the material to be covered in this course will be provided. Participants will be cautioned that dealing in puts and calls can be extraordinarily risky. Although high risk practices can lead to substantial gains, they are equally or more likely to produce substantial losses. A full appreciation of these risks is needed before put and call transactions are undertaken.

Individual interests and experience discussion

Class participants will have an initial opportunity to describe their previous related experiences and to explain what they hope to realize by completing this course.

Overview of financial derivatives

Financial derivatives bear certain similarities to mathematical derivatives. This notion will be discussed and the fundamental material surrounding financial derivatives will be explained.

The character of calls

Call options entitle owners to buy set amounts of securities at an agreed exercise price according to contractual terms. If the security price is above this exercise price the call is said to be in-the-money and will be exercised profitably. If the security price is below the exercise price the call is discarded as a worthless instrument and its owner bears the loss of the premium paid for it.

The character of puts

Put options entitle owners to sell securities in a manner similar to the call provisions described above. Thus, while call owners benefit from rising prices, put owners benefit from falling prices. It will be explained that using puts can be far more profitable and less risky than the more widely known practice of short selling.

Day 2 Using covered calls and protected puts

More details and precise calculations will be examined for puts and calls. Some comparisons with trading stocks will be examined to understand the different risk-reward opportunities.

Potential gains from using options

Options allow their users to greatly magnify the results of their transactions. Although this is a great feature when profitable, one needs to remember that losses can be magnified as well as gains. Wise use of financial derivatives can help traders to suitably manage the risk exposure to which they subject themselves.

Buying calls

Some typical call purchases will be examined. What does it cost to enter these transactions and what rewards are possible?

Buying puts

Some typical put purchases will be examined. What does it cost to enter these transactions and what rewards are possible?

Writing calls

Market participants have the opportunity to create calls just as easily as they can buy them. The difference between covered writing and naked writing will be examined. Covered writing can be used as a relatively low risk method for enhancing the return on portfolios. Naked writing can be used to lose more money than you have.

Writing puts

Although puts are often bought by people worried that the market price of a stock will fall, writers sell puts simply to collect the premium. In effect put writers are selling insurance to the put buyers. This can also be a profitable technique for establishing new positions in stocks.

Day 3 Trading strategies

How to trade options

Although most any brokerage has the potential for dealing in options, costs are often prohibitive. Discount brokers often proved services at a more affordable rate. Furthermore, even discount brokerage transaction costs become significant if economies of scale are not realized. How large must transactions be in order to be economical?

Writing covered calls

This practice is widespread among owners of substantial portfolios. It allows them to enhance their return without taking additional risks. However, it introduces a cost in the limitation of gains that are possible.

Writing protected puts

This practice effectively allows people with substantial cash on hand to enhance the earnings on that cash by essentially selling a form of insurance to stockholders. It also provides a cleaver way to enter newly desired positions more effectively than traditional limit orders.

Day 4 Practical applications

The various ideas covered will be pulled together to help people understand the assortment of activities that can be added to ordinary practices of portfolio management. Rather than being satisfied with the slow paced buy-and-hold strategy, or efforts to time the market, enjoyable ways to establish potentially profitable positions will be covered.

Enhanced returns

Putting your portfolio to work for you allows you to spend as much time as desired in managing positions that enhance return.

Protecting profits

Once a gain has been obtained it can be protected with a long position in a put contract. Further advances in the position value will add to the gain, but the put can be used effectively as insurance to avoid losing the gain previously realized.

Entering positions at lower prices

One of the common practices investors use is to employ limit orders to buy stocks. For example, if you wish to buy a stock and it is selling slightly above the price you are willing to pay a limit buy order can be used. Say the stock is selling for $32 and you would like to buy if the price were to be below $30. A limit order accomplishes this objective successfully in most cases when the market price dips below the specified limit of $30. Writing a put option on the stock accomplishes it if the price drops below $30 and is below $30 when the put expires.

Zero cost collars

A vast assortment of positions can be accomplished by combining several basic transactions together. For example zero cost collars can be employed to insure your portfolio when you are afraid of a substantial market downturn. As the name implies, these transactions can be accomplished without expending any money as the name implies. Creating zero cost collars is very simple. Once a position has been attained that you wish to preserve it can be accomplished with two steps. First, identify and purchase a put with an exercise price below the market that provides down side protection. Second, identify a call with an exercise price above the market that has a premium approximately equal to the premium needed to buy the put. Sell that call and use the received premium to pay for the call.