Strategies Using Options - Assignment Example

The writer will have the advantage of keeping his profit once the stock prices rise or remain the same and the writer loses profit if the stock value reduces. The payoffs on the covered call position are related to the short put standing, the premium is the same as of the naked put (Kendrick, 2012).

General electric trade shows the highest potential yields since it has a bid premium of $1.14 which yields 12.23% and GE decreased its dividend to $10 from a high of $31 per quarter.  Let’s look at the scenarios of payoffs at GE in a minimum span of six months,

One has an alternative of 100 shares at the price of $18.79 and sells the shares in January at $19.00 call at $1.14 per share and after a minimum number of days receive $114.00, later on, prior to expiration collect $30.00 with almost three times the original expected yield. 

 Protective Put

Is a risk management strategy for investors that involve the use of shares and stocks to guard against the loss of unrealized gains. It reduces the investor’s possible gain from the security he owns but is also a form of insurance. In the market, GE has provided a certain basis from which investors can make a proper analysis, an example of which we use here.

An investor purchased a stock of $12 that now is rated at a worth of $24 but has not put it on sale, the unrealized gains can be rated at $12. The investor can as well purchase a put option for the underlying stock if he still believes that he is not ready to sell but is also keen not to lose the gain of twelve. The investor can be able to increase the put options gain if the prices continue to rise and losses when they fall as illustrated in the graph.

Vertical Spread

An option can be said to be a strategy that is used by investors in trading. It involves a simultaneous purchase and sale of two options that are categorized under the same type but have different expiration dates. The two are sold at different strike prices. The payoffs are shown by the narrowing and albeit, widening of the differences that exist between the options premium position (Kendrick, 2012).

General Electric has given its stockholders such an option in the past and present trading which has become more important in the determination of the trends in the stock market. The most common vertical spread has been the bull vertical spread. The bull vertical spread used below shows the company’s profits in relation to payoffs. This has been illustrated in the graph below.