Demystifying the Butterfly Spread
The butterfly spread is an options trading strategy that combines three different types of option contracts into a position that is most profitable when the market price of the underlying stock that all three contracts cover shows little movement during the life of the contracts. Like the strangle option and the collar option, the butterfly [...]
Strategies for Selling Call Options
Selling a call option involves selling a future transaction in the underlying stock in which you’re obligated to participate. In exchange for having the option to buy 100 shares of the underlying stock from you at a specific strike price before a specific expiration date, the call buyer pays you, the call seller, a premium [...]
Using Call Options for Insurance
When you’re short a stock you’re completely exposed if the stock’s share price begins to rise. With a long position, your downside risk is limited to the value of the purchase but, when you’re short, the stock price could theoretically rise to infinity so your risk in being short is, again theoretically, infinite. Due to [...]
Strategies for Buying Put Options
I wrote a series of articles covering strategies for buying call options. Rather than repeat those strategies when they’re very similar when it comes to buying puts, I thought I’d concentrate on comparing and contrasting buying put options vs. buying call options instead. First off, buying a put option is the precise opposite of buying [...]
Using Call Options to Lock in a Purchase Price
Suppose you believe that a certain stock currently trading at $40 has a lot of upside potential if it rises past $45. The reasons you believe this could be from a technical analysis of past pricing and trading behavior, the pending launch of a new product or service that will propel the stock price if [...]
Using Call Options to Limit Risk
Risk is your constant companion when trading but, although risk is an integral part of investing as without risk there would be no incentive to trade, by accepting that risk exists doesn’t mean that you have to be at the mercy of risk. Call options help you limit risk if your wrong on a trade. [...]
Using Call Options to Gain Leverage
The most common way that call options are used is for speculation. Simply attempting to take advantage of what a trader believes will be an increasing share price in the underlying stock. But, if you move beyond simple speculation, there are other ways that call options can be used in options trading and one of [...]
Why Most Call Option Trades Occur Within $5 of Strike Price
When you buy a call option you profit when the price of the underlying stock rises above the strike price specified in your option contract. But, in reality rising past strike price isn’t enough as it doesn’t take into account the premium you paid to buy the contract in the first place. If you bought [...]
Understanding Option Contract Quotes
Like most avenues for investing, the world of options trading has developed its own series of shortcuts and abbreviations to express common concepts and frequently used information. Even though options trading incorporates only four types of trades involving buying or selling puts or calls, the various attributes that options contracts have makes it imperative that [...]
Who Are You Really Trading Options Contracts With?
A simplistic view of equity markets is that, when you place a buy order, you’re actually being paired up with another investor who owns that stock and a middleman like your brokerage or the exchange simply matches the two of you up. In reality, there are rarely enough buyers for all the sellers or sellers [...]