Put Options: Learn The Basics Of Buying And Selling | Bankrate

Options are very useful derivatives that let investors benefit from various strategies that, if done right, can protect them from downside risks and help them generate more profit than simply actually buying the asset they want. Here are 5 of the best options strategies you should probably check out if you want to experience the benefits of options trading.

Covered Call

This strategy involves buying a naked call option, or you can also structure a basic covered call or buy-write. This strategy is popular among investors because it helps them generate income and reduces some risks of being long stock alone.

The catch is that you need to be willing to sell your shares at a specific price, which is referred to as the short strike price. For this strategy, you need to buy the underlying stock and simultaneously write (sell) a call option on those same shares.

Investors sometimes use this strategy when they have a short-term position in the stock and neutral opinion regarding its direction. They may try to generate income via the sale of the call premium or they may protect against a potential decline in the underlying stock’s value.

Married Put

When an investor uses a married put strategy, he or she buys an asset and simultaneously buys put options for an equal number of shares. The put option holder has the right to sell stock at the designated strike price. Each of the contracts is 100 shares.

Investors use this strategy in order to protect themselves from the downside risks when holding a stock. It therefore serves as an insurance policy of sorts, establishing the a price floor should the stock’s price plummets suddenly.

Bull Call Spread

In this strategy, the investor simultaneously buys calls at a specific strike price and sells the same number of calls at a higher strike price. Both call options will sport the same expiration and underlying asset.

This kind of vertical spread strategy is used when an investors feels bullish on the underlying asset, which he expects to rise moderately in the price of the asset. The investor then limits his/her upside on the trade, but diminishes the net premium that is spent compared to buying a naked call option outright.

Bear Put Spread

Another vertical spread strategy, the bear put spread requires the investor to buy put options at a specific strike price and sell the same number of puts at a lower strike price at the same time. Both of the options are for the same underlying asset and will have the same expiration date.

The bear put spread strategy is generally used when the trader is bearish, meaning he expects the underlying asset’s price to decline in the near-term. This strategy also offers limited losses as well as limited gains.

Protective Collar

This strategy is done by buying an out-of-the-money put option and at the same time writing an out-of-the-money call option for the same underlying asset. Both contracts should have the same expiration.

The protective collar strategy serves well for investors after a long position in a stock has experienced substantial gains. This options combination enables investors to have downside protection (long puts to lock in profits), while having the tradeoff of potentially being obligated to sell shares at a higher price.

Mary Perreault

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