Investing In The Stock Market For Beginners

 But, the profit made from out of the money option will be limited to the selling price.  Once more, take the profit from out of the money and deduct the loss from in the money option; this will have a negative value. This is because the profit from the out of money option is less than the loss from in the money option. In this strategy, the profit from out of money option is limited and in the money option is unlimited.  Should the stock price continuously move to the negative side, your capital maybe totally diminished.  Now, what is the difference between buying naked option and buying option using spread strategy?  Mainly, the difference is that you can lose money should you buy naked option and lose lesser money should you opt for spread.  The reason is you don’t make any profit when you only buy naked option; while profit is made from the out of money option if the stock price moves to the negative side. The drawback of the spread is that the commission charged by the broker firm is twice compared to the naked option. This is due to the spread having involved two positions while naked option involves only one position. Each position will have a commission charged from it (separate commissions). After all, the objective of selling out of moneyoption in the spread strategy is to minimize the loss of the time value of in the money option. In reality, the time value of both in and out of the money option would depreciate when time has elapsed. Since we do not own the out of money option; we therefore can keep the money that we get from selling that option.

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