My option strategy,
By Lucas Downey Updated May 29, Traders often jump into trading options with little understanding of the options strategies that are available to them. There are many options strategies that both limit risk and maximize return.
Do you expect the shares to rise, fall, or flat line? Once you've got your basic forecast nailed down, browse through the appropriate section to determine the pros and cons of each approach, and decide which strategy will work best for you! Bullish Options Strategies If you're betting on a stock to climb the charts, this is the spot for you.
With a little effort, traders can learn how to take advantage of the flexibility and power that stock options can provide. Here are 10 options strategies that every investor should know.
By John Summa Updated Jul 10, Successful options trading is not about being correct most the time, but about being a good repair mechanic. When things go wrong, as they often do, you need the proper tools and techniques to get your strategy back on the profit track. Here we demonstrate some basic repair strategies aimed at increasing profit potential on a long call position that has experienced a quick unrealized loss. I always review a well thought-out set of "what-if" scenarios before putting any money at risk. Too often, though, beginner options traders give little thought to potential follow-up adjustments or possible repair strategies before establishing positions.
This is a very popular strategy because it generates income and reduces some risk of being long on the stock alone. The trade-off is that you must be willing to sell your shares at a set price— the short strike price. To execute the strategy, you purchase the underlying stock as you normally would, and simultaneously write—or sell—a call option on those same shares.
Options Strategy P/L Chart
For example, suppose an investor my option strategy using a call option on a stock that represents shares of stock per call option. For every shares of stock that the investor my option strategy, they would simultaneously sell one call option against it.
This strategy is referred to as a covered call because, in the event that a stock price increases rapidly, this investor's short call is covered by the long stock position. Investors may choose to use this strategy when they have a short-term position in the stock and a neutral opinion on its direction.
Because the investor receives a premium from selling the call, as the stock moves through the strike price to the upside, the premium that they received allows them to effectively sell their stock at a higher level than the strike price: strike price plus the premium received. The holder of a put option has the right to sell stock at the strike price, and each contract is worth shares. An investor may choose to use this strategy as a way of protecting their downside risk when holding a stock.
This strategy functions similarly to an insurance policy; it establishes a price floor in the event the my option strategy price falls sharply. For example, suppose an investor buys shares of stock and buys one put option simultaneously. This strategy may be appealing for this investor because they are protected to the downside, in the event that a negative change in the stock price occurs. At the same time, the investor would be able to participate in every upside opportunity if the stock gains in value.
The only disadvantage of this strategy is that if the stock does not fall in value, the investor loses the amount of the premium paid my option strategy the put option. With the long put and long stock positions combined, you can see that as the stock price falls, the losses are limited. However, the stock is able to participate in the upside above the premium spent on the put. Both call options will have the same expiration date and underlying asset.
Using this strategy, the investor is able to limit their upside on the trade while also reducing the net premium spent compared to buying a naked call option outright. For this strategy to be executed properly, the trader needs the stock to increase in price in order to make a profit on the trade. The trade-off of a bull call spread is that your upside is limited even though the amount spent on the premium is reduced.
When outright calls are expensive, one way to offset the higher premium is by selling higher strike calls against them. This is how a bull call spread is constructed.
Twitter Peggy James is a CPA with 8 years of experience in corporate accounting and finance who currently works at a private university, and prior to her accounting career, she spent 18 years in newspaper advertising. She is also a freelance writer and business consultant. Article Reviewed on October 29, Margaret James Updated October 29, A covered call is an options strategy involving trades in both the underlying stock and an options contract. The trader buys or owns the underlying stock or asset. They will then sell call options the right to purchase the underlying asset, or shares of it and then wait for the options contract to be exercised or to expire.
In this strategy, the investor simultaneously purchases put options at a specific strike price and also sells the same number of puts at a lower strike price.
Both options are purchased for the same underlying asset and have the same expiration date. This strategy is used when the trader has a bearish sentiment about the underlying asset and expects the asset's price to decline.
The strategy offers both limited losses and limited gains.
My Options Strategy
In order for this strategy to be successfully executed, the stock price needs to fall. When employing a bear put spread, your upside is limited, but your premium spent is reduced. If outright puts are expensive, one way to offset the high premium is by selling lower strike puts against them.
This is how a bear put spread is constructed. The underlying asset and the expiration date must be the same. This strategy is often used by investors after a long position in a stock has experienced substantial gains. This allows investors to have downside protection as the long put helps lock in the potential sale price. However, the trade-off is that they may be new trading system for binary options to sell shares at a higher price, thereby forgoing the possibility for further profits.
This is a neutral trade my option strategy, which means that the investor is protected in the event of a falling stock.
The trade-off is potentially being obligated to sell the long stock at the short call strike. However, the investor will likely be happy to do this because they have already experienced gains in the underlying shares. Theoretically, this strategy allows the investor to have the opportunity for unlimited gains.
10 Options Strategies to Know
At the same time, the maximum loss this investor can experience is limited to the cost of both options contracts combined.
This strategy becomes profitable when the stock makes a large move in one direction or the other. An investor who uses this strategy believes the underlying asset's price will experience a very large movement but is unsure of which direction the move will take. For example, this strategy could be a wager on news from an earnings release for a company or an event related to a Food and Drug Administration FDA approval for a pharmaceutical stock. Losses are limited to the costs—the premium spent—for both options.
This strategy becomes profitable when the stock makes a very large move in one direction or the other.
Long Call Butterfly Spread The previous strategies have required a combination of two different positions or contracts. All options are for the same underlying asset and expiration date. For example, a long butterfly spread can be constructed by purchasing one in-the-money call option at a my option strategy strike price, while also selling two at-the-money call options and buying one out-of-the-money call option.
A balanced butterfly spread my option strategy have the same wing widths. An investor would enter into a long butterfly call spread when they think the stock will not move much before expiration. The maximum loss occurs when the stock settles at the lower strike or below or if the stock settles at or above the higher strike call.
This strategy has both limited upside and limited downside. Iron Condor In the iron condor strategy, the investor simultaneously holds a bull put spread and a bear call spread. The iron condor is constructed by selling one out-of-the-money put and buying one out-of-the-money put of a lower strike—a bull put spread—and selling one out-of-the-money call and buying one out-of-the-money call of a higher strike—a bear call spread.
All options have the same expiration date and are on the same underlying asset. This trading strategy earns a net premium on the structure and is designed to take advantage of a stock experiencing low volatility.
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Many traders use this strategy for its perceived high probability of earning a small amount of premium. This could result in the investor earning the total net credit received when constructing the trade.
The further away the stock moves through the short strikes—lower for the put and higher for the call—the greater the loss up to the maximum loss. My option strategy loss is usually significantly higher than the maximum gain.
This intuitively makes sense, given that there is a higher probability of the structure finishing with a small gain. Iron Butterfly In the iron butterfly strategy, an investor will sell an at-the-money put and buy an out-of-the-money put.
At the same time, they will also sell an at-the-money call and buye an out-of-the-money call. It is common to have the same width for both spreads.
The long, out-of-the-money call protects against unlimited downside. The long, out-of-the-money put protects against downside from the short put strike to zero. Profit and loss are both limited within a specific range, depending on the strike prices of the options used. Investors like this strategy for the income it generates and the higher probability of a small gain with a non-volatile stock.
The maximum gain is the total net premium received. Maximum loss occurs when the stock moves above the long call strike or below the long put strike. Compare Accounts.