Option Strategies: An Introduction

Option Strategies

This section of our website introduces options and stock investors to some basic common stock options strategies.

You can search our Strategy Index section to learn the basics of the most commonly used option strategies.

Exchange-traded options have many advantages for buyers of these strategies, including flexibility, leverage, limited risk, and contract validity guaranteed by the Options Clearing Corporation .

Options allow you to participate in the movement of stock prices without investing a large amount of money to buy the stock outright.

Options can also be used to hedge existing stock positions, buying or selling stocks at a more favorable price than the current market price. If it is a write (i.e. sell) option, the option can also be used to earn premium income.

Options give you optionality. You are not limited to buying, selling, or staying out of the market.

You can use options to tailor your position to your financial situation, outlook for the stock market, and risk tolerance.

Summary

Whether you are a conservative or growth investor, or even a short-term aggressive trader, your broker will help you choose the appropriate options strategy.

The strategies presented in this strategy overview section are not all, or even most, strategies that utilize options.

But these strategies are basic. They are good building blocks for more complex strategies.

Despite their many benefits, options are not suitable for all investors.

An article lists the uses and risks of options. Individual investors should not trade options before reading and understanding this document that discloses the risks of options.

An investor who wishes to use options should have a clear investment goal and a plan for achieving that goal. This investment goal should be appropriate to his or her specific financial situation.

General considerations

In all strategy examples in this section of our website, we assume that the options used are regular, listed, American-style common stock options. In the profit and loss calculations, we do not consider margin requirements, transaction and commission costs, and taxes.

You should be aware that in addition to federal margin requirements, each brokerage firm may have its own margin rules. These rules may be more detailed, specific, and restrictive. In addition, each brokerage firm may have its own guidelines for commissions and transaction costs.

You should understand in detail the specific procedures, regulations, fees and commission rules of each of your brokerage companies.

To successfully use options, one must proactively understand what options are, how they work, and what the risks of a particular option strategy are. In today’s market, individuals seeking more investment opportunities will find options trading challenging, fast-moving, and potentially rewarding.