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From Theory To Practice

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Cost Basis Reduction

From Theory To Practice

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

As active traders, we have several key advantages at our disposal. We trade in optimal time frames, and we trade overstated volatility, but perhaps our biggest advantage is cost basis reduction. Cost basis reduction involves layering on additional trades or positions onto our original positions. These additions serve as “overlays” to that original position, and they lower the initial cost of that original trade. As a result, we give up unlimited upside in exchange for a higher probability that the trade will be successful. Several examples of how to execute cost basis reduction strategies are explored. Specifically, we walk through short puts, covered calls, and short OTM spreads.

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