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Bloopers & Blunders: Option Strategies

Quotation

"On Friday afternoon, an institutional investor, evidently concerned that an investment in MFS Communications was not moving, decided to pick up a little income by selling call options on the stock." (L.A. Times, August 27, 1997)

Analysis

Intermediate Level: requires some knowledge of options. If you believe that a stock’s price will not be moving significantly in any direction, then you can make some income by selling, or writing, call and put options simultaneously, not just call options. Conversely, if you believe that stock prices will be moving considerably but don’t know the direction, then you should buy both put and call options. Note that the purchase/sale of both put and calls simultaneously is called a straddle.