OPTIONs ..don't let the new terms panic you into AVOIDANCE.

When buying a Stock ( with nothing known) its 50%/50% of rising, or falling.

.

The purpose of OPTIONs is to create an advantage; it's   LEGAL !,

it requires Capital, ( or it can be  a use of idle Capital)

it can be used to SELL, BUY or just trade sideways....depending on the stocks behavior.

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OPTIONs contracts can provide insurance against poor stock behavior,

..or, you've just become the CEO of an insurance Co. and now 'YOU' make the decisions,

as to What and When to Buy or Sell.

( normally*   implies exceptions when a stock is SPLIT; lets ignore that complication)

IF you bought a $10 stock, and it just moves sideways (9.50 to 10.50);

the CALL contract, when SOLD can  offer a monthly return. The challenge is to pick the

'Strike Price', Monthly 'expiration date', and the SELL 'price' and WHEN to trade.

The SAFEST way to sleep at night is to own the 100 sh before selling the CALL contract.

But KNOWING, vs studying the probabilities of a stocks behavior are different events.

By using Bollinger Bands, RSI and MACD charts a high point of a stock may be implied.

Assume you own 1000 sh of a $10 stock, and thus can SELL 10 CALL contracts;

['a' decision is toughest when ONLY 100 are owned, and ONLY 1 decision can safely be made]

IF a stock is RISING.... let it.

IF its falling............you should have exited yesterday.

..however IF

it moves Sideways...let OPTIONs generate monthly premiums for the account.

The 'I told you so' risk of options is that the $10 stock invents gold and rises to $50 or $100,

and you MUST sell at the contract STRIKE price.

To date my stock selection has NOT suffered that fate, and I'm inclined to be more than satisfied when a $10 stock is CALLed from me at a short-term trade of $11, or $12, (or both) results.

The difference between BUYing and SELLing a CALL is more than the direction of cash flow.

The BUYer (spending -$$$) MUST be right by the expiration date, or the CAPITAL is lost !

The SELLler, is willing to accept the premium and maybe sell the equity by the expiration date.

but the seller  has other OPTIONs (choices); they can BUY back the contract,

and SELL Next month (or later),  most likely for a higher price !

( how far is the STRIKE price from the market price?,, the closer - the BETTER )

[Think as the EXPIRATION date = JUNE, for our still $10 stock ]

OFFERed +1.00   at the start of the month, and by the 4th week of the month the stock the

$10 stock remains   ...A) below $10,      B) 10 to $11,     C) above $11

(we're still talking.. so the stock has NOT been called)

A) Below $10 the BUYer lost -$100/contract...which the seller received.

B) Someone ( the Broker ?) will CALL the stock at $10 ...IF no action is taken ...by the SELLer

C) The BUYer has finally  begun to PROFIT.

... the BUYer loses for A&B,

the SELLer gains for price "A",and cal SELL for $10 plus the $1 premium...OR

and can buy back the CALL contract for the market price

and resell into some future month for another PREMIUM....the magic of selling Covered CALLs

(   you are SELLing TIME).

Look at the GREEN line at the end of JUNE.... that is the MAGIC of selling OPTIONs .

So for June you pocketed +1.00

and July generated another +1.00   ( or 0.10, or 0.50 or... its STOCK dependent )

IF the stock is CALLed  in July, about $2 was gained on a $10 stock in 2 months.

Other negative results can occur;  ....  IF the stock drops to $5...

the stock buyer ( ONLY ) has lost $5, the CALL seller lost $4.00 ( value...)

and now still owning the stock, can sell 5, 7.5 or 10 CALL contracts to reduce the damage.

When a contract is traded, the BUYER , at EXPIRATION, has  to be correct to be  PROFITABLE.

IF the  price moves, (not as anticipated)

the seller of the JUNE contract   can buy  the JUNE contract,

( close the JUNE obligation) and sell again, this time into JULY .

..or IF you have a Vacation trip to Alaska scheduled...skip JULY and sell AUG. ...or even JANUARY

'How to BUY stocks' more intelligently... of course with  OPTION contracts

...named 'PUTs'  .

While the BUYer of a CALL (thinks they ) 'KNOW ' the stock is about to rise...

the buyer (-$$) of a PUT knows/fears the stock will fall (significantly) , and is willing to pay,( buy)

a PUT contract for serious downside protection  for a premium (-$$) for the opportunity  to sell the lower priced stock for the known STRIKE price, by the expiration date.

On the other side of the contract, the PUT seller, looks at the BollingerBands, Likes the stock at the current price( a drop from (10.60??) above, back to 10.00) and is MORE than willing to buy the stock for -$10.00  with  the premium of ...+.0.50(??)

..

IF the stock holds at ...10.05 ...you are left with +0.50/sh. and NO stock.

Or 'WHAT IF' the stock fell to $5, and was put to you at $10....

In that case the STOCK buyer (and hold) at $10,   lost $5 value,

the PUT seller loses $4.50, but now owns the stock and may sell COVERED CALLs for a 2nd premium to nullify some of the negative movement. .....OR

may have bought back the PUT and sold into a future month for another premium,

and delay the CAPITAL expenditure ( not obligation) inyo another month

So, in short,

a stock holder may sell CALLs to generate income,

or sell PUTs to buy a stock at a (potentially ) lower than current market value. (or not at all )

By watching the Bollinger Bands,(and other indicators)    With a stock price :

RISE we'll learn to sell CALLs and close PUT positions.

..and conversely when Bollinger Bands fall

we can sell PUTs, and close CALLs    to create an ADVANTAGED positions

One AAII speaker STRONGLY promotes the idea that leaving profits in the market to gain MORE

is the greatest SELLing mistake made.         ....don't !

Always be aware of 'RISK!',

Only sell CALLs covered by owning the stock,

and

ONLY sell PUTs with reserve CASH to BUY the contracted STOCK.

... When to   TRADE ? ?

As the RSI goes above .5, .6, .7?? selling 5 CALL contracts would generate some CAPITAL for the month. IF the RSI continued above  .8, .9 selling 2 more contracts would capture an  even higher PREMIUM.  IF the stock continues to RSI= 1.0  selling 2 and keeping the last "1" would generate an increased return....

and keep an OPTION available for the last 100 shares  ( when gold is discovered ).

On the downside of the  RSI, below 0.5 some CALLs should be closed (in the event it goes back up)

and when lower than 0.2 ( IF there is capital interest in owning MORE stock)..

Below 0.2 is the time to sell 'some PUTs on the intended stock.  IF you can buy 200 sh,

only sell 1 PUT now, and at a lower price sell more PUT(s) for the better premium...

Remember rules 2&1,

Rule 2 says REMEMBER Rule #1   Stating that you have the CAPITAL to buy the PUT stock !

'AMAT'  has strike prices at 11, 12, 13, 14  ..., but with the chart at 12.50

selling $13 calls, and $12 puts guarantees one contract to expire,   ...while both...could,

The stock could  range from 11.50 to 13.50 on expiration day . (with BOTH being executed)

..but I think thats called  a BLACK SWAN day.    or highly unlikely