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It can also be a way to limit the risk of owning the stock directly. For example, some traders might use a long call rather than owning a comparable number of shares of stock because it gives them upside while limiting their downside to just the call's cost — versus the much higher expense of owning the stock — if they worry a stock might fall in the interim.

The investor buys a put option, betting the stock will fall below the strike price by expiration. If the stock declines significantly, traders will earn much more by owning puts than they would by short-selling the stock.

Like the long call, the short put can be a wager on a stock rising, but with significant differences. The payoff profile of one short put is exactly the opposite of the long put.

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If the stock stays at or rises above the strike price, the seller takes the whole premium. If the stock sits below the strike price at expiration, the put seller is forced to buy the stock at the strike, realizing a loss. Why use it: Investors often use short puts to generate income, selling the premium to other investors who are betting that a stock will fall. Like someone selling insurance, put sellers aim to sell the premium and not get stuck having to pay out. A falling stock can quickly eat up any of the premiums received from selling puts.

If the stock dips below the strike at expiration, the put seller is assigned the stock, with the premium offsetting the purchase price. If the stock remains above the strike at expiration, the put seller keeps the cash and can try the strategy again. The covered call starts to get fancy because it has two parts.

The investor must first own the underlying stock and then sell a call on the stock. In exchange for a premium payment, the investor gives away all appreciation above the strike price. This strategy wagers that the stock will stay flat or go just slightly down until expiration, allowing the call seller to pocket the premium and keep the stock.

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If the stock sits below the strike price at expiration, the call seller keeps the stock and can write a new covered call. If the stock rises above the strike, the investor must deliver the shares to the call buyer, selling them at the strike price. The investor buys or already owns shares of XYZ. As the stock rises above the strike price, the call option becomes more costly, offsetting most stock gains and capping upside. If the stock rises above the strike at expiration, the call seller must sell the stock at the strike price, with the premium as a bonus.

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If the stock remains below the strike at expiration, the call seller keeps the cash and can try the strategy again. Like the covered call, the married put is a little more sophisticated than a basic options trade. For each shares of stock, the investor buys one put. This strategy allows an investor to continue owning a stock for potential appreciation while hedging the position if the stock falls. It works similarly to buying insurance, with an owner paying a premium for protection against a decline in the asset.

The investor already owns shares of XYZ. If the married put allowed the investor to continue owning a stock that rose, the maximum gain is potentially infinite, minus the premium of the long put. The investor hedges losses and can continue holding the stock for potential appreciation after expiration. James F.