More About Trading Options
More experienced option traders use the basic elements of Calls and Puts to create different option positions
or strategies. By buying or selling calls and puts at different strike prices different trading exposures that
provide various profit outcomes can be designed.
In addition to buying options, calls and puts can be sold.
Selling Calls: By selling a call you take on the obligation to sell stock at a certain time
(on or before the expiration date) at a given price (strike price). For this obligation you are paid and keep
the option premium. If the stock rises above the strike price before the expiration date it is likely you will
be obligated to sell the stock at the given strike price. When selling calls "naked" the seller must buy the
stock at the prevailing market price and sell it at the strike price if the option is exercised. When selling
"covered" calls, the seller has the stock already owned "called away" at the strike price value.
Selling Puts: By selling a put you take on the obligation to buy stock at a certain time
(on or before the expiration date) at a given price (strike price). For this obligation you are paid and keep
the option premium. If the stock falls below the strike price before the expiration date it is likely you will
be "put" the stock meaning you will be obligated to buy the stock at the given strike price. When selling puts
"naked" the seller must buy the stock at the prevailing market price and then can decide to keep it or sell it
at the prevailing market rate.
Traders can use the buying of options to create different profit profiles. For example buying a call and put
at the same strike price is called a "straddle" and profits the option holder if the stock goes up or down by
an amount greater than the combined option premiums. By adding selling options to the mix a variety of more
sophisticated option exposures can be developed. The combination of buying or selling options at various strike
prices allow traders to tailor a trading exposure that best fits their risk to return profile.
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