The options are some of the favored. Vehicles for traders because they can. Be traded at a rapid pace making. Losing a lot of money quickly. Options strategies range from fairly. Simple to very complicated with various. Options and payoffs sometimes they have. Odd names. Iron condor anyone. In spite of their complexity the majority of. Options strategies are constructed around. Two basic types of options. The put and the call here are. Five strategies that are popular. A breakdown of their reward and risk. when a trader might leverage. Them for his next purchase. While these strategies are easy to implement. They can also make traders. A lot of money but they’re not. Completely risk-free here are a few. Guidelines on the fundamentals of call. Options and put options before we start.
In this strategy the trader purchases. A call known as “going long”. A call and anticipates the price of the shares to rise above the strike price before the time of expiration. The benefit of this investment is unlimited, and investors can get a huge return on their initial investment, if the price rises. Example: Stock X is trading at $20 per share, and the call with a strike value of $20 and expiration within four months , is traded at $1. The contract is priced at $100, which is one call * $1 * 100 shares represented per contract. Reward or risk: In this scenario the trader makes even by paying $21 per share, that is, the strike cost plus the $1 premium that is paid. Above twenty dollars,
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A covered call is the process of selling the option of a call (“going short”) however with a twist. Here the trader sells the option but also buys the stock underlying the option, which is 100 shares for each call sold. The stock’s ownership turns a potentially risky trade -called the short call- into a relatively safe trade that can generate earnings. The market expects the price to be lower than the strike price at the time of expiration. If the stock is priced above that price at expiration, the owner must sell the stock to the buyers of the call at strike prices. Examples: Stock X is trading at $20 per share. Similarly, calls with a strike value of $20 and expiration within four months is trading at $1. The contract will pay a premium of $100, which is one contract * $1 * 100 shares by each contract.
In this strategy, the trader buys a put that is referred to as “going long” a put and hopes for the stock price to be lower than the strike price at expiration. The upside on this trade could be several times the initial investment in the event that the stock falls significantly. Example: Stock X is trading for $20 per share. a put with a strike price of $20, and expiration date of four months is priced at $1. The contract is $100, or an entire contract * 100 shares represented per contract. Risk/reward: In this instance the put will break even when the stock trades at the expiration of the option at $19 per share or the strike price less the $1 premium. Below $19 the put increases by $100 per dollar that the stock falls. Above $20, the puts expires and is worthless, and the trader loses the full premium of $100.
This is the reverse from the traditional long put however, in this case, the trader sells the put — also referred to as “going short” a put and anticipates that the price of the stock will be above the strike price at expiration. In exchange to sell a put the trader receives a cash premium that is the highest amount that a put with a shorter term can earn. If the stock trades below the strike price by option expiration, the trader must buy it at the strike price. close at the price of the strike or greater when the option expires. The stock needs to be at or above that strike price to cause the option to run out of value leaving you with the full amount of the premium.
This is a variation of the long put with twist. The trader is the owner of the stock, and buys put. This is a hedged deal that is where the buyer anticipates that the stock will go up but also wants “insurance” in the event that the price falls. In the event that the stock drops the long put will offset the loss. Example: Stock X is trading at $20 per share. the put with a strike price of $20 and expiration within four months is trading at $1. The contract costs $100, which is one contract * 100 shares each contract. The trader purchases 100 shares for $2,000 and buys one put for $100.