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Reasons to trade options

How can I reset my password? Where can I find my account number? Search for something. Home Learn Learn share trading What is Options trading? What is options trading? What is an option? What are call options? What are put options? Risks to trading options The risks involved in using options depends on the strategy employed.

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Reasons to trade options Just as in every other investment choice, circumstances of the individual are important in determining the "right" options strategy. Here are some of the reasons that investors and traders may want to trade options: Investors Earn income from your share portfolio - Investors can generate income from their portfolio by writing call options against their stock holdings. This is known as a covered call, or buy-write, and is one of the most commonly employed strategies by investors. Protect share holdings — investors concerned about the near term outlook for a stock holding can protect against a share price fall by taking a put option in that stock.

Options are available over more than 70 of the top shares listed on Australian exchanges. Protect portfolios — investors worried about the market outlook can offset potential portfolio losses by taking put option over the index.

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If the market falls, the put options increase in value as the portfolio declines. The effectiveness of this strategy depends on a number of factors, including the composition of the individual portfolio. If the share price is below the option strike price at expiry, the investor buys the stock at the strike price and keeps the premium for the original put option write. However in this scenario the investor still keeps the original premium. This is often referred to as a cash-covered put write.

Trade more opportunities — Option prices are sensitive to more factors than just the movement in the underlying share or index. Changes in volatility, interest rates and dividends can affect the value of options. This means traders can choose positions that reflect their views on more instruments and markets. Increase capital efficiency through leverage — traders use the leverage options provide.

This leverage comes at higher risk. Tailor market exposures — there are many option structures and strategies available. A proper understanding of the risks involved opens up the world of collars, straddles, strangles, vertical and horizontal spreads, butterflies and condors, among many others. Traders can profit from a stock or index rising, falling, or standing still. Traders can construct positions that give more exact exposures to a potential event.

Buying a Call: The Coupon Analogy

Limit position risk — the taker of an option can only lose the initial premium. Traders take advantage of this characteristic in many ways.

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Examples include investing a small percentage of the value of a basket of stocks in put options, reducing the overall risk of the traders position. A trader who believes Bank A is cheap relative to Bank B could take call options in Bank A, and put options in Bank B, reducing the risk of the trade to the premium spent.

Buy B or Sell S : The buyer of the option is the taker. The seller is the writer.



The quantity of option contracts to trade: Most share options have a contract size of shares. The code of the option: The first three letters of the code are the underlying instrument. The last three characters are unique for each option. Buying put options and continuing the prior examples, a trader is only risking a small 0. This prevents the trader from incurring a single substantial loss, which is a real reality when stock trading. Options are tools offering the benefits of leverage and defined risk. But like all tools, they are best used in specialized circumstances.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. We hate spam - see our privacy policy. Skip to content. Disclosure: Your support helps keep Commodity.

Put options: Learn the basics of buying and selling

Learn more Contents What Are Put Options? Further Reading. Chart 1. Chart 2. Trading options without fully understanding how they work or how volatile they can be is dangerous and could lead you to lose significant amounts of money. Despite their popularity, options can be highly risky and should only be used by experienced traders who can handle their risk.

Products like Motley Fool Options will give you the tools you need to learn how to properly invest in options. All Rights Reserved. Sign in. Forgot your password? Get help. Password recovery. Money Crashers. About Money Crashers. Recent Stories. Investing 5 Best Industrial Stocks to Buy in Read more. Advertiser Disclosure X Advertiser Disclosure: The credit card and banking offers that appear on this site are from credit card companies and banks from which MoneyCrashers.

Date February 11, TJ Porter. Share This Article. Dig Deeper.

What Is a Put Option? Examples and How to Trade Them in - TheStreet

Investing Stocks. Follow MoneyCrashers. Trending Articles. Become a Money Crasher! Join our community. Share this Article. What Are Options? The party buying the option pays a premium to the party that writes the option. There are three elements to all options, regardless of their type: An underlying security A strike price An expiration date Each option contract describes a transaction that could occur in the future.

A typical contract involves shares of whatever underlying security is involved. Call Options Call options are one of the two main types of options.