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Considerations for options trading

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Interest Rate Options. Dow Jones Industrial Average. Dow Jones Transportation Average. Dow Jones Utility Average. When purchasing options, the maximum risk is the purchase price and the profit is unlimited to the upside. However, when selling an option, the maximum profit is the sale price and the risk is unlimited. An investor should be very careful and very educated before selling options. There is a safer way to gain exposure or hedge the downside of an ETF than selling a call option.

If you think an ETF will decline in value or if you want to protect downside risk, buying a put option may be the way to go. A put option is the right to sell an ETF at a certain price. Again, you have to factor the purchase price into your equation. When you sell a put option, you give the right to the put buyer to sell the ETF at the strike price at ay time before expiration. This is the opposite position of purchasing a put, but similar to buying a call. You want the ETF to rise or stay above the strike price.

However, if the ETF drops below the break-even price, you will start to incur losses on every put that is exercised. Again, it is important to note that selling options have more risk than buying options. The cost of that risk is factored into the price of an option. But if you are a beginner in the world of calls and puts, buying ETF options is the safer route. While there are many more ways to incorporate ETF option strategies into your portfolio, these are the basics of trading ETF derivatives.

Once you feel comfortable with the foundations of options trading, only then should you consider more intermediate or complex trading strategies like straddles and volatility arbitrage.