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This section of our site provides an introduction to some of the basic equity option strategies available to option and/or stock investors.
Click on the image below for an explanation of the strategy.
Exchange-traded options have many benefits including flexibility, leverage, limited risk for buyers employing these strategies, and contract performance guaranteed by
The Options Clearing Corporation.
- Options allow you to participate in price movements without committing the large amount of funds needed to buy stock outright.
- Options can also be used to hedge a stock position, to acquire or sell stock at a purchase price more favorable than the current market price, or, in the case of writing (selling) options, to earn premium income.
- Options give you options. You�re not just limited to buying, selling or staying out of the market.
- With options, you can tailor your position to your own financial situation, stock market outlook and risk tolerance.
Whether you are a conservative or growth-oriented investor, or even a short-term, aggressive trader, your broker can help you select an appropriate options strategy.
The strategies presented in this strategy review do not cover all, or even a significant number, of the possible strategies utilizing options.
These are the most basic strategies, however, and will serve well as building blocks for more complex strategies.
Despite their many benefits, options are not suitable for all investors.
Individuals should not enter into option transactions until they have read and understood the risk disclosure document, Characteristics and Risks of Standardized Options, which outlines the purposes and risks thereof.
Further, if you have only limited, or no experience with options, or have only a limited understanding of the terms of option contracts and basic option pricing theory, you should examine closely another industry document, Understanding Stock Options.
An investor who desires to utilize options should have well-defined investment objectives suited to his particular financial situation and a plan for achieving these objectives.
There are tax ramifications of buying or selling options that should be discussed thoroughly with a broker and/or tax advisor before engaging in option transactions. OCC publishes another document, Taxes & Investing, which can serve to enlighten both you and your tax advisor on option strategies and the issue of taxes.
All strategy examples described in this section of our site assume the use of regular, listed, American-style equity options, and do not take into consideration margin requirements, transaction and commission costs, and taxes in their profit & loss calculations.
You should be aware that in addition to Federal margin requirements, each brokerage firm can have its own margin rules that can be more detailed, specific or restrictive. In addition, each brokerage firm may have its own guidelines with respect to commissions and transaction costs.
It is up to you to become fully informed on the specific procedures, rules and/or fee and commission schedules of your specific brokerage firm(s).
The successful use of options requires a willingness to learn what they are, how they work, and what risks are associated with particular options strategies. Individuals seeking expanded investment opportunities in today�s markets will find options trading challenging, often fast moving, and potentially rewarding.
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