Category: 4. options trading strategies

You may be wondering why you would want to buy call or put options instead of directly buying the stock or other asset. The answer is all about controlling investment risk.

If you buy or short sell a stock, you have to live with the results of an investment that goes up or down. Further, your gains (and losses) are limited to the amount of stock you can afford, not including margin borrowing. Options change that formula in a way that can benefit certain investment strategies.

Buying options can limit your losses. When you trade put and call options, the most you can lose is the amount you pay for the option. When you invest in an asset directly, your entire investment is at risk.

Another reason to use options is for leverage. Each option contract represents 100 shares of the asset. If you have strong convictions that an asset will go up or down, you can 100x your investment exposure using options. For example, if you buy one contract for a stock and it goes up $1 per share, your options contract earns $100. That’s an exciting prospect for some traders, particularly those with a shorter-term investment outlook.

In most cases, options investors pay an up-front fee to buy the option. You can view options for a specific security on an options chain, a visual display that shows you currently available options for that stock or commodity.

Call options give you the right to buy a security at a specific future price, indicating that you think the price of an asset will increase between buying the option and the exercise date. Put options give you the option to sell an asset, similar to short selling, where you profit if the asset value falls. Every contract gives you the right to buy or sell 100 shares.

If the underlying investment is worth more than the agreed upon purchase price (also known as the strike price), the option is considered “in the money” and exercising it will yield a profit. Conversely, if the investment is worth less than the strike price, the investment is “out of the money” and expires unprofitable, with the initial cost considered an investment loss.Options vs. Futures: Options give you a choice to buy or sell an asset on a specific future date, while futures contracts require you to buy or sell on the specific future date. This makes options less risky than futures in most situations.

Options are a financial derivative: a product that derives its value from another underlying investment. As the name implies, options give you the option (not a requirement) to buy an investment at a specific price on a future date.

Investments are a fairly advanced investment product. Many brokerages require customer approval and place limits on the ability to trade options. Newer options traders may be limited to call and put options, while more experienced traders could access more advanced and riskier options strategies.

Because options can be complex, it’s best to get a lot of experience with puts and call before exploring more exotic trades such as the excitingly named “iron condor” or the “reverse iron albatross spread.” When you focus on basic call and put options, it’s easier to understand what you’re doing and limit your potential losses.

If you’re wondering how to trade options, you’ve come to the right place. Options are an investment product that gives you the option to buy a specific stock, bond, commodity or other underlying investment at a specific price on a specific future date. The main tools to trade options are calls and puts. In this guide we will cover what is options trading, the difference between puts and calls, and how you can use them in your investment strategy.