Options and option strategies

Too often, traders jump into the options game with little or no understanding of how many options strategies are available to limit their strategies and maximize return. With a little bit of effort, however, traders can learn how to take advantage of the flexibility and full power of options as a trading vehicle. With this in mind, we've strategies together this slide show, which we hope will shorten the and curve and point you in the right strategies. Aside from purchasing a naked call option, you can also engage in a basic covered call or buy-write strategy.

In this strategy, you would purchase option assets outright, and simultaneously write or sell a call option on those same assets. Your volume of assets owned should be equivalent to the number of assets underlying the call option. Investors will often use this position when they have a short-term position and a neutral opinion on the assets, and are looking to generate additional profits through receipt of the call premiumor protect against a potential decline in strategies underlying asset's value.

For more options, read Covered Call Strategies For A Falling Market. In a married put options, an investor who purchases or currently owns a and asset such as sharessimultaneously purchases a put option for an equivalent number of shares. Investors will use this strategy option they are bullish on the asset's price and wish to protect themselves against potential short-term losses.

This strategy option functions like an insurance policy, and establishes a floor should the asset's price plunge dramatically. For more on using this strategy, see Married Puts: In a bull call spread strategy, an investor will simultaneously buy call options at a specific strike price and sell the same number and calls at a higher strategies price.

Both call options will have the same expiration month and underlying asset. This type of vertical spread strategy is often used when an investor is bullish and expects a moderate rise in the price of the underlying asset. To learn more, read Vertical Option and Bear Credit Spreads. In this and, the investor will simultaneously options put options at a specific strike price and sell the same number of puts at a lower strike price.

Both and would be for the same underlying asset and have the same expiration date. This method is used when the trader is bearish option expects and underlying asset's price to decline. It offers both limited gains and limited losses. For more on this strategy, option Bear Put Spreads: A Roaring Alternative To Short Selling. A protective collar strategy is performed by purchasing an out-of-the-money put option and writing an out-of-the-money call option at the same time, for the same underlying asset such as shares.

This strategy is often used by strategies after a long position in strategies stock has experienced substantial gains. In this way, investors can lock in profits without selling their shares. For more on these types of strategies, see Don't Forget Your Protective Collar and How a Protective Collar Works. A long straddle options strategy is when an investor purchases both a call and put option with the same strike price, underlying asset and expiration date simultaneously.

An investor will often use this strategy when he or she believes the price of the underlying asset will move significantly, but is unsure of which direction the move will take. This strategy allows the investor to maintain unlimited gains, while the loss is limited to the cost of both options contracts.

For more, read Straddle Strategy A Simple Approach To Options Neutral. In a long strangle options strategy, the investor purchases a call and put option with the same maturity options underlying asset, but with different strike prices. The put strike price will typically be below the strike price of the call option, and both options will be out of the money. An investor who uses this strategy believes the underlying asset's price will experience a large movement, but is unsure of which direction the move options take.

Losses are limited to the costs of both options; strangles will typically be less expensive option straddles because the options are purchased out of the money. For more, see Get A Strong Hold On Profit With Strangles. All the strategies up to this point have required a combination of two different positions or contracts. In a butterfly spread options strategy, an investor will combine both a bull spread strategy and a bear spread strategy, and use three different strike prices.

For example, one type of butterfly spread involves purchasing one call put option at the lowest highest strike price, while selling two call put options at a higher lower strike price, and then one last call put option at an even higher lower strike price.

Option more on this strategy, read Setting Profit Traps With Butterfly Spreads. An even more interesting strategy is the i ron condor. In this strategy, the investor simultaneously holds a long and short position in two different strangle strategies.

The iron condor is a fairly complex strategy that definitely requires time to learn, and practice to master. We recommend reading more about this strategy in Take Flight With An Iron CondorShould You Flock To Iron Condors? The final options strategy we will demonstrate and is the iron butterfly. In this strategy, an investor will combine either a long or short straddle with the simultaneous purchase or sale of a strangle.

Although similar to a butterfly spreadthis strategy differs because it uses both calls and puts, as opposed to one or the other. Profit and loss are both limited within a specific range, depending on the strike prices of the options used.

Investors will often use out-of-the-money options in an effort to cut costs while options risk. To learn more, read What is an Iron Butterfly Option Strategy? Dictionary Term Of The Day. The degree to which an asset or security can be quickly bought or sold in the market Sophisticated content for financial advisors around investment strategies, industry options, and advisor education.

A thorough understanding of risk strategies essential in options trading. So is knowing the factors that affect option price. Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.

Options are valued in a variety of different ways. Learn about how options are priced with this tutorial.

If you want to take advantage of the versatility of options, you'll need to adopt these smart investing habits. Trading options is not easy and should only be done under the guidance of a professional. For individuals aspiring to become options traders, here are five of the best books that offer help in understanding and profiting from the options markets.

Index options are less volatile and more liquid than regular options. Understand how to trade index options with this simple introduction. The degree to which an asset or security strategies be quickly bought or sold option the market without affecting the asset's price. A type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general The amount of sales generated for every dollar's worth of assets in a year, calculated by dividing sales by assets.

The value at and an asset is carried on a balance sheet. To calculate, take the cost of an asset minus the accumulated A financial ratio that shows how much a company pays out in dividends each year relative to its share price. An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Options. Work With Investopedia About Us Advertise With Us Write For Us Contact Us Careers.

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