Options are a type of derivative that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specified date. Options can be used to speculate on the future price of an asset, to hedge against risk, or to generate income.
Basic Options Strategies
Basic strategies
There are two basic types of options: calls and puts. A call option gives the buyer the right to buy the underlying asset at a specified price on or before a specified date. A put option gives the buyer the right to sell the underlying asset at a specified price on or before a specified date.
Buying Calls
A bullish investor may buy a call option if they believe that the price of the underlying asset will rise. The investor will profit if the price of the underlying asset rises above the strike price of the option.
Buying Puts
A bearish investor may buy a put option if they believe that the price of the underlying asset will fall. The investor will profit if the price of the underlying asset falls below the strike price of the option.
Selling Calls
A bearish investor may sell a call option if they believe that the price of the underlying asset will not rise as much as the market expects. The investor will profit if the price of the underlying asset remains below the strike price of the option.
Selling Puts
A bullish investor may sell a put option if they believe that the price of the underlying asset will not fall as much as the market expects. The investor will profit if the price of the underlying asset remains above the strike price of the option.
Advanced Options Strategies
In addition to the basic options strategies, there are a number of more advanced strategies that can be used to generate profits or reduce risk. Some of these strategies include:
- Spreads: A spread is a combination of two or more options that are bought or sold together. Spreads can be used to reduce risk or generate income.
- Straddles: A straddle is a combination of a call option and a put option with the same strike price and expiration date. Straddles are used to bet on large movements in the price of the underlying asset.
- Strangles: A strangle is similar to a straddle, but the call option and the put option have different strike prices. Strangles are used to bet on large movements in the price of the underlying asset, but with less risk than a straddle.
- Combinations: A combination is a combination of three or more options. Combinations can be used to create complex strategies that can be used to generate profits or reduce risk.
What do we cover in this article?
Options can be a powerful tool for investors, but they can also be risky. It is important to understand the risks involved before trading options. Investors should also consult with a financial advisor before trading options.