10 Options Strategies to Know

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Option rookies are often eager to begin trading — options strategies eager. Each is less risky than owning stock. Most involve limited risk. For investors not familiar with options lingo read our beginners options terms and intermediate options terms posts. Using stock you already own or buy new sharesyou sell someone else a call option that grants the buyer the right to buy your stock at a specified price. That limits profit potential. You collect a cash premium that is options strategies to keep, no matter what else happens.

That cash reduces your cost. Thus, if the stock declines in price, you may incur a loss, but you are better off than if you simply owned the shares. Cash-secured naked put writing. Sell a put option on a stock you want to own, choosing a strike price that represents the price you are willing to pay for stock. You collect a cash premium in return for accepting an obligation to buy stock by paying the strike price. A collar is a covered call position, with the addition of a put.

The put acts as an insurance policy and limit losses to options strategies minimal but adjustable amount. The purchase of one call option, and the sale of another. Options strategies the purchase of one put option, and the sale of another. Both options have the same expiration. Thus, the higher priced option is sold, and a less expensive, further out of the money option is bought.

This strategy has a market bias call spread is bearish and put spread is bullish with limited profits and limited losses. A position that consists of one call credit spread and one put credit options strategies.

Again, gains and losses options strategies limited. Diagonal options strategies double diagonal spread. These are spreads in which the options have different strike prices and different expiration dates. The option bought expires later than the option sold 2. The option bought is further out options strategies the money than the option sold. The likelihood of consistently making money when buying options is small, and I cannot recommend that strategy. Enter your email address.

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These exotic-sounding strategies may hold the key to getting the most out of your portfolio—and they may not be as exotic as you think. Read up on more than two dozen option strategies. These options strategies can be great ways to invest or leverage existing positions for investors with a neutral market sentiment. Bullish Neutral Bearish These options strategies can be great ways to invest or leverage existing positions for investors with a neutral market sentiment.

Reversal Primarily used by floor traders, a reversal is an arbitrage strategy that allows traders to profit when options are underpriced. To put on a reversal, a trader would sell stock and use options to buy an equivalent position that offsets the short stock.

Conversion Primarily used by floor traders, a conversion is an arbitrage strategy that allows traders to profit when options are overpriced. To put on a conversion, a trader would buy stock and use options to sell an equivalent position that offsets the long stock.

Collar Bullish investors seeking a low-risk strategy to use in conjunction with a long stock position may want to try a Collar. In the example here, a collar is created by combining covered calls and protective puts.

Butterfly Ideal for investors who prefer limited risk, limited reward strategies. When investors expect stable prices, they can buy the butterfly by selling two options at the middle strike and buying one option at the higher and lower strikes.

The options, which must be all calls or all puts, must also have the same expiration and underlying. Condor Ideal for investors who prefer limited risk, limited reward strategies. The condor takes the body of the butterfly - two options at the middle strike 0 and splits between two middle strikes. In this sense, the condor is basically a butterfly stretched over four strike prices instead of three. Long Straddle For aggressive investors who expect short-term volatility yet have no bias up or down i.

This position involves buying both a put and a call with the same strike price, expiration, and underlying. Short Straddle For aggressive investors who don't expect much short-term volatility, the short straddle can be a risky, but profitable strategy.

This strategy involves selling a put and a call with the same strike price, expiration, and underlying. Long Strangle For aggressive investors who expect short-term volatility yet have no bias up or down i. This strategy typically involves buying out-of-the-money calls and puts with the same strike price, expiration, and underlying.

Short Strangle For aggressive investors who don't expect much short-term volatility, the short strangle can be a risky, but profitable strategy. This strategy typically involves selling out-of-the-money puts and calls with the same strike price, expiration, and underlying. The profit is limited to the credit received by selling options.

The potential loss is unlimited as the market moves up or down. Put Ratio Spread For aggressive investors who don't expect much short-term volatility, ratio spreads are a limited reward, unlimited risk strategy.

Put ratio spreads, which involve buying puts at a higher strike and selling a greater number of puts at a lower strike, are neutral in the sense that they are hurt by market movement. Calendar Spread Calendar spreads are also known as time or horizontal spreads because they involve options with different expiration months. Because they are not exceptionally profitable on their own, calendar spreads are often used by traders who maintain large positions.

Typically, a long calendar spread involves buying an option with a long-term expiration and selling an option with the same strike price and a short-term expiration.