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 [...]

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 [...]

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 [...]

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 [...]

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 [...]

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. [...]

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 [...]

You open an option contract by making one of four trades.  You either buy a call option, buy a put option, sell a call option, or sell a put option.  In each of these cases you can either trade the option contract before expiration, exercise the contract in the case of a buy or have [...]

Trading in options is trading in contracts and, like any contract, an options contract has terms that both the buyer and the seller must agree upon in order to execute the trade.  The standardized terms that govern option contracts specify the four key elements that define a particular contract and distinguish it from all other [...]

On paper, an option contract is a simple proposition.  For the payment of a premium you buy the right to buy or sell 100 shares of stock at a specific price before a specific expiration date. If the market price in the underlying stock represented by the option rises then call options you’ve bought become [...]