Understanding options
What are options?
An option is a contract that represents the right to buy or sell a financial product at an agreed-upon price for a specific period of time. You can typically buy and sell an options contract at any time before expiration.
Options are available on numerous financial products, including equities, indices, and ETFs. Options are called "derivatives" because the value of the option is "derived" from the underlying asset.
Owning an option, in and of itself, does not impart ownership in the underlying security, nor does it entitle the holder to any dividend payments.
Why trade options?
Whether you're bullish, bearish, or neutral with equities trading, you are limited to buying and selling. Incorporating options into your U.S. investing strategy gives you the ability to implement additional strategies such as:
- Buying the right to purchase a stock at a specified price between now and a future date.
- Getting paid to potentially purchase a stock at a discount to its current price.
- Protecting a stock in your portfolio from a substantial price decline.
- Generating income on existing stocks in your portfolio.
What are call options and put options contracts?
Call options
A call option gives the contract owner/holder (the buyer of the call option) the right to buy the underlying stock at a specified strike price by the
Tooltip
. Calls are typically purchased when you expect that the price of the underlying stock may go up.
Put options
A put option gives the contract owner/holder (the buyer of the put option) the right to sell the underlying stock at a specified strike price by the expiration date. Puts are typically bought when you expect that the price of the underlying stock may go down.
Common options strategies
- Objective
- Outlook
- Strategy
- Description
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ObjectiveIncome generationOutlookNeutral to bullishStrategyCovered CallDescriptionSell a call against an existing stock position
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ObjectiveIncome generationOutlookNeutral to bullishStrategyCash-Secured PutDescriptionSell a put, secured by cash set aside in case of assignment
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ObjectiveHedgingOutlookNeutral to bearishStrategyProtective PutDescriptionBuy a put on an existing stock position
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ObjectiveSpeculationOutlookEither directionStrategyStraddleDescriptionBuy a call and a put at the same strike
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ObjectiveSpeculationOutlookEither directionStrategyDebit SpreadDescriptionBuy and sell calls with different strike prices and/or expirations, or buy and sell puts at the same time
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