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A - Z List of Trading Strategies

NerdWallet adheres to strict standards of editorial integrity to help you make decisions with confidence. Consider what kind of contact you prefer. The owner of an option may on-sell the option to a third party in a secondary market , in either an over-the-counter transaction or on an options exchange , depending on the option. The maximum loss is limited to the purchase price of the underlying stock less the strike price of the put option and the premium paid. Covered Calls for ARW. AL Air Lease Corp.

Index Options. Index options make it possible for investors to seek either profit or protection from price movements in a market as a whole or in broad segments of a particular market.

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If the stock drops below the strike price, your option is in the money. Option quotes, technically called option chains, contain a range of available strike prices. The price you pay for an option has two components: The price you pay for an option, called the premium, has two components: Intrinsic value is the difference between the strike price and the share price, if the stock price is above the strike.

Time value is whatever is left, and factors in how volatile the stock is, the time to expiration and interest rates, among other elements. Every options contract has an expiration date that indicates the last day you can exercise the option. Your choices are limited to the ones offered when you call up an option chain.

Expiration dates can range from days to months to years. Daily and weekly options tend to be the riskiest and are reserved for seasoned option traders. For long-term investors, monthly and yearly expiration dates are preferable. Longer expirations give the stock more time to move and time for your investment thesis to play out. A longer expiration is also useful because the option can retain time value, even if the stock trades below the strike price.

If a trade has gone against them, they can usually still sell any time value remaining on the option — and this is more likely if the option contract is longer. Options trading can be complicated. That education can come in many forms, including:. How to open a brokerage account. Reliable customer service should be a high priority, particularly for newer options traders. Consider what kind of contact you prefer.

Does the broker have a dedicated trading desk on call? What hours is it staffed? What about representatives who can answer questions about your account? Even before you apply for an account, reach out and ask some questions to see if the answers and response time are satisfactory.

Options trading platforms come in all shapes and sizes. They can be web- or software-based, desktop or online only, have separate platforms for basic and advanced trading, offer full or partial mobile functionality, or some combination of the above. This method is used when the trader is bearish and expects the underlying asset's price to decline.

It offers both limited gains and limited losses. For more on this strategy, read Bear Put Spreads: Now that you've learned a few different options strategies, if you're ready to take the next step and learn to:.

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 investors after a long position in a stock has experienced substantial gains.

In this way, investors can lock in profits without selling their shares. 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. In a long strangle options strategy, the investor purchases a call and put option with the same maturity and 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 will take. Losses are limited to the costs of both options; strangles will typically be less expensive than straddles because the options are purchased out of the money.

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. On a certain occasion, it was predicted that the season's olive harvest would be larger than usual, and during the off-season, he acquired the right to use a number of olive presses the following spring.

When spring came and the olive harvest was larger than expected he exercised his options and then rented the presses out at a much higher price than he paid for his 'option'. In London, puts and "refusals" calls first became well-known trading instruments in the s during the reign of William and Mary.

Their exercise price was fixed at a rounded-off market price on the day or week that the option was bought, and the expiry date was generally three months after purchase.

They were not traded in secondary markets. In the real estate market, call options have long been used to assemble large parcels of land from separate owners; e. Many choices, or embedded options, have traditionally been included in bond contracts. For example, many bonds are convertible into common stock at the buyer's option, or may be called bought back at specified prices at the issuer's option. Mortgage borrowers have long had the option to repay the loan early, which corresponds to a callable bond option.

Options contracts have been known for decades. The Chicago Board Options Exchange was established in , which set up a regime using standardized forms and terms and trade through a guaranteed clearing house. Trading activity and academic interest has increased since then.

Today, many options are created in a standardized form and traded through clearing houses on regulated options exchanges , while other over-the-counter options are written as bilateral, customized contracts between a single buyer and seller, one or both of which may be a dealer or market-maker. Options are part of a larger class of financial instruments known as derivative products , or simply, derivatives.

A financial option is a contract between two counterparties with the terms of the option specified in a term sheet. Option contracts may be quite complicated; however, at minimum, they usually contain the following specifications: Exchange-traded options also called "listed options" are a class of exchange-traded derivatives. Exchange-traded options have standardized contracts, and are settled through a clearing house with fulfillment guaranteed by the Options Clearing Corporation OCC.

Since the contracts are standardized, accurate pricing models are often available. Over-the-counter options OTC options, also called "dealer options" are traded between two private parties, and are not listed on an exchange. The terms of an OTC option are unrestricted and may be individually tailored to meet any business need.

In general, the option writer is a well-capitalized institution in order to prevent the credit risk. Option types commonly traded over the counter include:. By avoiding an exchange, users of OTC options can narrowly tailor the terms of the option contract to suit individual business requirements. In addition, OTC option transactions generally do not need to be advertised to the market and face little or no regulatory requirements.

However, OTC counterparties must establish credit lines with each other, and conform to each other's clearing and settlement procedures. With few exceptions, [10] there are no secondary markets for employee stock options. These must either be exercised by the original grantee or allowed to expire. The most common way to trade options is via standardized options contracts that are listed by various futures and options exchanges.

By publishing continuous, live markets for option prices, an exchange enables independent parties to engage in price discovery and execute transactions. As an intermediary to both sides of the transaction, the benefits the exchange provides to the transaction include:. These trades are described from the point of view of a speculator. If they are combined with other positions, they can also be used in hedging.

An option contract in US markets usually represents shares of the underlying security. A trader who expects a stock's price to increase can buy a call option to purchase the stock at a fixed price " strike price " at a later date, rather than purchase the stock outright. The cash outlay on the option is the premium. The trader would have no obligation to buy the stock, but only has the right to do so at or before the expiration date.

The risk of loss would be limited to the premium paid, unlike the possible loss had the stock been bought outright. The holder of an American-style call option can sell his option holding at any time until the expiration date, and would consider doing so when the stock's spot price is above the exercise price, especially if he expects the price of the option to drop.

By selling the option early in that situation, the trader can realise an immediate profit. Alternatively, he can exercise the option — for example, if there is no secondary market for the options — and then sell the stock, realising a profit.

A trader would make a profit if the spot price of the shares rises by more than the premium. For example, if the exercise price is and premium paid is 10, then if the spot price of rises to only the transaction is break-even; an increase in stock price above produces a profit.

If the stock price at expiration is lower than the exercise price, the holder of the options at that time will let the call contract expire and only lose the premium or the price paid on transfer. A trader who expects a stock's price to decrease can buy a put option to sell the stock at a fixed price "strike price" at a later date. The trader will be under no obligation to sell the stock, but only has the right to do so at or before the expiration date.

If the stock price at expiration is below the exercise price by more than the premium paid, he will make a profit. If the stock price at expiration is above the exercise price, he will let the put contract expire and only lose the premium paid. In the transaction, the premium also plays a major role as it enhances the break-even point. For example, if exercise price is , premium paid is 10, then a spot price of to 90 is not profitable.

He would make a profit if the spot price is below It is important to note that one who exercises a put option, does not necessarily need to own the underlying asset.

Specifically, one does not need to own the underlying stock in order to sell it. The reason for this is that one can short sell that underlying stock. A trader who expects a stock's price to decrease can sell the stock short or instead sell, or "write", a call. The trader selling a call has an obligation to sell the stock to the call buyer at a fixed price "strike price".

10 Options Strategies To Know

For example, if you believe the share price of a company currently trading for $ is going to rise to $ by some future date, you’d buy a call option with a strike price less than $ (ideally a strike price no higher than $ minus the cost of the option, so that the option remains profitable at $). A - Z List of Trading Strategies. Below you will find a simple alphabetical list of all the options trading strategies that we cover on this site. If you are looking for further details on a specific strategy then simply scroll down to that one and click on the relevant link. We have also provided a very brief description of each one. Get the latest option quotes and chain sheets, plus options trading guides, articles and news to help you fine-tune your options trading strategy.