A covered call is when you sell someone else the right to purchase a stock that you already own (hence "covered"), at a specified price (strike price), by a certain date (expiration date). To learn more about covered calls and additional options trading strategies, check out our educational article Options Trading: Basics of a Covered Call Strategy.
Cash-secured puts are an options strategy where you sell a put option while also setting aside the entire sum of money you would have to pay if you're assigned a put. To learn more about cash-secured puts, check out our educational article Managing Cash-Secured Puts.
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A protective put is a strategy that involves buying a put option with a strike price that is usually at or below the current price of a stock that you own and believe might go down in price. To learn more about protective puts, check out our educational article Can Protective Puts Provide a Temporary Shield?
A collar is when a trader buys an out-of-the-money protective put for downside protection and simultaneously sells an out-of-the-money covered call. The premium earned from selling the call can help lower the overall cost of the protective put. To learn more about collars, check out our educational article Collaring Your Stock for Temporary Protection.
A long straddle is a strategy consisting of the purchase of both a call and a put option with the same expiration date and strike price on the same underlying security. A long straddle offers an opportunity to make money when a stock or index moves substantially. To learn more about long straddles and additional trading strategies for speculating, check out our educational article Straddles vs. Strangles Options Strategies.
Vertical spreads are options strategies where you simultaneously buy and sell options that are of the same type (calls or puts) and have the same expiration date but with different strike prices. To learn more about vertical spreads, check out our educational article Out-of-the-Money and In-the-Money Vertical Spreads.
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Options traders can purchase or sell different options contracts to tailor positions to their market expectations. Options strategies can benefit from directional moves or from stock prices staying within a defined range. Strategies vary significantly from single-leg options to more complex multi-leg positions with long and short options.
Risk defined strategies are positions where the maximum loss is defined at trade entry. Risk defined strategies can be used to create a maximum loss scenario and help investors manage downside exposure. Single-leg long options have a maximum loss limited to the cost when the position is opened.
Multi-leg options can be used to define risk by simultaneously buying and selling long and short contracts. With multi-leg options strategies, profit potential may also be defined. With net debit multi-leg strategies, the loss is still limited to the original debit paid, and profit may be limited to the width of the spread minus the cost of the trade.
For example, a $5 wide debit spread that costs $2.00 has a max loss of $200 and a max gain of $300 per contract. Short multi-leg options collect a credit when the contract is opened. The credit received is the maximum amount that can be gained. The maximum loss in a risk defined strategy is the width of the spread minus the credit received.
For example, when selling a naked call option, the option writer is required to sell shares at the strike price if assigned stock. Because stock can potentially go up indefinitely, the risk is not defined. Selling a call option with a $100 strike price for $2.00 has $200 of potential profit but unlimited maximum loss if the underlying stock rises significantly.
Unlike risk defined strategies, naked options require more margin to be held in the account and more capital to hold the position. The margin needed to hold an unlimited risk strategy may not be static. If volatility in the market rises, margin requirements may increase because the brokerage firm wants to ensure enough money is in the account to cover an assignment in the underlying asset.
The further above or below the payoff diagram line is from the x-axis, the greater the profit or loss at expiration. The point (or points) where the payoff diagram line crosses the x-axis is the break-even price at expiration.
An option is a leveraged financial instrument that derives its value from an underlying security. An option contract is an agreement between a buyer and a seller that gives the buyer the right, but no obligation, to buy or sell the underlying security at a specific price on or before a specific date.
Options trading enable investors to be more dynamic than buying and selling stocks. Traders typically use options to generate income, speculate on future price, and hedge existing positions in their portfolio. Options are available for a wide variety of stocks and ETFs.
Most investors are familiar with stocks, and they are relatively straightforward: buy stock from a company, and hope to sell the shares at a higher price in the future. Options are more complex, but also give investors more flexibility and make it easier to capitalize on bullish, bearish, and neutral market conditions.
One key difference is every options contract has an expiration date, which introduces a time component to every position. Options pricing is determined by multiple factors and is constantly changing based on market conditions and the underlying's price movement.
Options trading is available at many brokers. Each brokerage offers a wide range of platform tools, online resources, desktop and mobile applications, and education. However, most popular brokers offer similar capabilities and fees.
Options trading typically includes commissions charged by the broker, as well as exchange and regulatory fees. However, Option Alpha's autotrading platform includes commission-free* trading through exclusive agreements with TradeStation and Tradier brokerage.
Many new options traders start with covered calls. Covered calls are a natural bridge for investors because they combine stock ownership with options trading to generate income on long equity positions.
Traders can also use slightly more complex multi-let strategies known as spreads. Spreads include two, three, or four legs and typically have defined risk and limited profit potential. Selling options spreads, such as iron condors and iron butterflies, can be used to generate income.
Single-leg call and put options are generally a great place to start if you're new to options trading. Debit spreads and credit spreads are also good for beginners looking to take the next step and build slightly more complex strategies with defined risk/reward profiles.
A sideways market is one where prices don't change much over time, making it a low-volatility environment. Short straddles, short strangles, and long butterflies all profit in such cases, where the premiums received from writing the options will be maximized if the options expire worthless (e.g., at the strike price of the straddle).
Protective puts are insurance against losses in your portfolio. Like all other types of insurance, you pay a regular premium to the insurer and hope that you never need to file a claim. The same is true for portfolio protection: you pay for the insurance, and if the market does crash, you'll be better off than if you didn't own the puts.
A calendar spread involves buying (selling) options with one expiration and simultaneously selling (buying) options on the same underlying in a different expiration. Calendar spreads are often used to bet on changes in the volatility term structure of the underlying.
A box is an options strategy that creates a synthetic loan by going long a bull call spread along with a matching bear put spread using the same strike prices. The result will be a position that always pays off the distance between the strikes at expiration. So if you put on a 20-strike, 40-strike box, it will always expire worth $20. Prior to expiration, it will be worth less than $20, making it function like a zero-coupon bond. Traders use boxes to borrow or lend funds for money management purposes depending on the implied interest rate of the box.
A simple bullish strategy for beginners that can yield big rewards. A call gives the buyer the right, but not the obligation, to buy the underlying stock at strike price A. However, you can simply buy and sell a call before it expires to profit off the price change.
To provide you with unerring accuracy, especially with unusual options activity for complex strategy types, OptionStrat calculates and charts trades using data provided exclusively by the Options Price Reporting Authority (OPRA). That means OptionStrat gets the same data that your trading platform does, including consolidated last sale and quotation information. Data lags by only 15 minutes for free users. Premium accounts receive live auto-refreshing data. 152ee80cbc