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Traders who use a long call strategy are betting that the market price of the underlying asset will go up. The strategy is one that's implemented most by investors and involves buying a regular call option. Call options carry a premium, which fluctuates during the life of the option. When traders implement a long call strategy, they enter the market at lower costs, which limits their risk and gives them leverage, as the underlying asset appreciates. The most a trader can lose is the amount that he or she pays in premiums. At the same time, there is no limit to how much profit an investor can make, since the potential growth of any underlying asset is infinite. Definition of ATM, ITM and OTM for Calls: There are three ways to define the relationship between an option's strike price and the market price of its underlying asset. Understanding the differences between the terms is important because the risks involved in implementing a long call strategy depend on these terms at the time of purchase. ATM - At The Money: The underlying asset's market price equals the option's strike price. Example: - Call Option XYZJan40 (strike price $40) - XYZ is trading at $40 ITM - In The Money: The underlying asset's market price is more than option's strike price. Example: - Call Option XYZJan40 (strike price $40) - XYZ is trading at $50 OTM - Out of The Money: The underlying asset's market price is less than option's strike price. Example: - Call Option XYZJan40 (strike price $40) - XYZ is trading at $30 How to Implement a Long Call Strategy (ATM): XYZ is trading at $40 (market price) 1) Option Available: XYZJan40($2)- 100 shares of XYZ stock - Strike Price $40 (ATM), expiring in 30 days- Premium Cost of $2 2) Trader buys 1 call option at $200 (100 x $2 (premium cost)). Result one: XYZ hits $50 (ITM). The call buyer exercises his or her right to buy 100 shares at $40, paying $4000 to the seller and immediately selling the 100 shares at market price for $5000. After subtracting the $200 in premiums paid, the long call strategy results in an $800 profit (20%). Result two: XYZ hits $30 (OTM). The buyer lets the option expire, does not exercise his or her right to buy and loses the amount of premiums paid. In this example, the option buyer would lose $200 (premiums paid). Advantage and Disadvantage of a Long Call Strategy: Pluses: The upside to this type of strategy is that there are no limits to the amount of profit an investor can make. If the underlying asset's market value takes off, the call will grow, and the trader will exercise it before the option expires. Another advantage to the long call strategy is that the cost of entering the market is very low. As a result, the lower buying cost limits a trader's overall risk and adds leverage to the investor's portfolio. Minuses: The downside to implementing a long call strategy is that the investor loses when the value of the option fall OTM. Although, the most an investor can lose is only the amount that he or she paid in premiums to buy the option. Examples of Implementing a Long Call Strategy

Traders who implement an ITM covered call strategy writes (sells) a call option for leverage against potential losses on owned shares. They also gain a steady premium when the market rises. The strategy involves writing a call option ITM and buying the same number of regular shares of the underlying asset. A long call strategy guarantees traders a steady return in bull markets. Premiums received from writing the call cut losses, if the price of the underlying asset falls. Definition of ITM, ATM and OTM for Covered Calls There are three ways to define the relationship between an option's strike price and the market price of its underlying asset. Understanding the differences between the terms is important when considering the returns involved in implementing a covered call strategy. ITM - In The Money: The underlying asset's market price is more than option's strike price. Example: - Call Option XYZJan45 (strike price $45) - XYZ is trading at $50 ATM - At The Money: The underlying asset's market price equals the option's strike price. Example: - Call Option XYZJan45 (strike price $40) - XYZ is trading at $45 OTM - Out of The Money: The underlying asset's market price is less than option's strike price. Example: - Call Option XYZJan45 (strike price $40) - XYZ is trading at $55 How to Implement a Covered Call Strategy (ITM) XYZ is worth $50 (market price) 1) Trader buys 100 shares of XYZ preferred stock and pays $5000. 2) Trader writes (sells) a call option: XYZJan45($7) - 100 shares of XYZ stock - Strike Price $45 (ITM), expiring in 30 days - Premium Cost of $7 3) Trader receives $700 in premiums (100 x $7 (premium cost)). Total Investment cost: $4300 [$5000 (paid) -$700 (premiums collected)] Result one: XYZ hits $55 (ITM). The call buyer exercises his or her right to buy 100 shares at $45, paying $4500 for the seller's assets. After adding the $200 in premiums received, the trader's covered call strategy results in a $200 profit [$4500 (received) - $4300 (Paid)]. Result two: XYZ hits $45 (ATM). The call buyer lets the option expire and the writer keeps the premiums paid. The shares held by the writer loses $500 in paper value [$5000 (paid) -$4500 (worth on strike date)], but since the writer received $700 in premiums, he or she still makes a profit of $200. [$700 (premiums collected) -$500 (loss)] Result three: XYZ hits $40 (OTM). The call buyer lets the option expire and the writer keeps the premiums paid. The shares held by the writer loses $1000 in paper value [$5000 (paid) -$4000 (worth on strike date)], but since the writer received $700 in premiums, his or her loss reduces to $300. [$700 (premiums collected) -$500 (loss)] Advantage and Disadvantage of Implementing a Covered Call Strategy: Pluses: The upside to this type of strategy is that the investor will always make a profit when the price of the underlying asset rises. Another advantage in using a covered call strategy is that the investor can also profit from a drop in price of the underlying asset. Writing the call option leverages the investment against market downturns, and it gives the trader a cushion for reducing his or her losses. Minuses: The downside in using covered call strategy is that the method limits an investor's profits. If the underlying asset's market value takes off, the trader cannot take advantage of the gain because he or she must sell assets at a fixed price after assignment.

A covered call strategy is an approach for traders who own an underlying asset. The method allows them to make a profit when the underlying asset's market price goes up moderately and to buffer losses if market prices go down. The strategy limits profits to only what is gained on paper plus any premiums earned. Loss potential is the same for any investor holding the underlying asset, but traders who leverage their assets by using a covered call strategy can cushion shortfalls in their portfolio. Definition of OTM and ITM for Covered Calls There are two ways to define the relationship between an option's strike price and the market price of its underlying asset. Understanding the differences between the terms is important because the risks involved in implementing a covered call strategy depend on these terms at the time of writing the option. OTM - Out of The Money: The underlying asset's market price is less than option's strike price. Example: - Call Option XYZJan55 (strike price $55) - XYZ is trading at $50 ITM - In The Money: The underlying asset's market price is more than option's strike price. Example: - Call Option XYZJan45 (strike price $40) - XYZ is trading at $50 How to Implement a Covered Call Strategy (OTM) XYZ is trading at $50 (market price) 1) Trader buys 100 XYZ shares for $5000 (100 x $50 share cost)). 2) Trader writes (sells) the option: XYZJan55($2) - 100 shares of XYZ stock - Strike Price $55 (OTM), expiring in 30 days - Premium Cost of $2 3) Trader receives $200 from the buyer (100 x $2 (premium cost)). Total Investment cost: $4800 ($5000-$200) Result one: XYZ hits $57 (ITM). The call buyer exercises the option to buy 100 shares at $55. The call seller sells his or her 100 shares and receives at $5500, for a total profit of $700 ($5500 received from buyer - $4800 total investment cost). Result two: XYZ hits $43 (OTM). The call buyer lets the contract expire. In this example, the option seller would keep the asset and the $200 in premiums, but would suffer a $700 loss on paper ($4300 asset's worth -$5000 paid). The total loss reduces to $500 when adding the premium. Advantage and Disadvantage of a Covered Call Strategy: Pluses: The upside to this type of strategy is that traders get to earn a premium on top of any paper gain their from owned assets. Another advantage to the covered call strategy is that premiums can reduce any loss incurred from a decline in the underlying asset's market price. Minuses: The downside to implementing a covered call strategy is that a trader's profits are limited to only the gain on paper plus the premiums received from the call buyer. The investor can not receive any future profits from gains the underlying asset's market price because he or she would have sold the asset upon assignment. Examples of Implementing a Covered Call Strategy ITM: In the example above the investor sold the call OTM. Traders can choose to write an option at ITM, which will give them more leverage against declining market prices. Example: XYZ is trading at $50 (market price) 1) Trader buys 100 XYZ shares for $5000 (100 x $50 share cost)). 2) Trader writes (sells) the option: XYZJan45($8) - 100 shares of XYZ stock - Strike Price $45 (ITM), expiring in 30 days - Premium Cost of $8 3) Trader receives $800 from the buyer (100 x $8 (premium cost)). Total Investment cost: $4200 ($5000-$800) Result: The trader's profits are reduced if the option expires ITM, but his or her losses also reduce if the underlying asset's market price falls, providing an $800 cushion instead of $200, compared to the example above.

What is a protective put? A protective put is as its name implies, a form of insurance to protect a long position held in a stock. Buying a protective put insures the stockholder a maximum loss of the put's strike price. For example (see diagram) if the shareholder has 100 shares of stock ABC with a share price of $52, then a contract (1 contract=100 shares) can be purchased to limit losses at the strike price of the option. Let's say the option strike price is $50, then the maximum loss per share is $2 plus the premium paid (the cost of purchasing a contract). Let's say the premium for a contract is $2 (1 contract =100 shares=$200), then the maximum loss in the trade is $400. On the other hand, the profit potential is unlimited if the share price goes up and the only loss is that of the premium paid of $200. If the stock reaches $54, then the shareholder has broke even in the trade and realizes only profit as the stock goes up. So the key aspect of the protective put is that it minimizes loss in the case of a bad earnings report, share dilution, etc. Are protective puts a valid strategy? Some would say that buying protective puts is not a good strategy for the risk averse. The argument here is that the risk averse should stay away from stocks altogether and focus on less risky instruments such as bonds. However, for the astute investor, protective puts can provide a useful tool, for example, during times of higher risk such as right before an earnings report is announced, or just prior to a FDA announcement on drug approval. If premiums are purchased just before news and just before the front month expiration, the loss incurred will be minimal if the stock averts disaster and heads skyward. It is good to think of options in this sense like any other type of insurance (car insurance, homeowner's insurance, etc.). It seems like a waste of money if there aren't any problems, but if there are, you are glad you have it. Types of stocks to consider a put strategy in The types of stocks that are the best to use the protective put strategy on are highly volatile stocks with extreme amounts of upside and downside. The best example that comes to mind are small biotech stocks in which the success or failure of the company relies on a binary yes/no decision by the FDA. If the drug is accepted, then the stock often skyrockets, but if it fails these stocks can almost go to zero overnight. In this case a great strategy is to buy the stock and protective puts immediately before the announcement and if approval is won, the loss of the premium paid will seem like nothing compared to the extreme amount of profits that are possible. Other types of stocks that can work well with this investment strategy include other small cap stocks, volatile ETFs and index funds that commonly exhibit large price changes. Stocks to stay away from with this strategy would be large, stable blue chip stocks that are typically much less volatile. Paying for protective puts in the case of these stocks is much more likely to result in futile expiration and loss of the premium.

The concept of the strike price is key to a trade in the options market or in the binary options markets. Whenever a trade is contracted, it is based on a delivery of the security purchased at a pre-agreed price on a future date. This pre-arranged price between the dealer and the trader is known as the strike price. Traders use this price to hedge against future price fluctuations, and dealers use this as a means of guarding against price manipulations by traders on the actual exchanges where the exchange of the physical commodities being traded is done.

Traders who use a bull call spread strategy are betting that the market price of the underlying asset will go up moderately or substantially. The strategy involves buying a call option, and hedging it, by selling the same quantity of call options. A bull call spread strategy limits the investment's potential profit, but it also lowers the trader's exposure. Investors can trade options at a discount when using this strategy. It requires less cash to get into the market, which may help investors when trading options that they are less familiar with. How to Enter a Bull Call Spread A trader must perform two operations at the same time to enter a bull call spread. First, a trader will need to buy a call that's In-The-Money (ITM). Example: XYZ is trading at $42 (market price) Buying a Call 1) Call Option Available: XYZJan40 ($3) - ITM - One Option = 100 shares of XYZ stock - Strike Price $40/per share, expiring on 1/15 - Premium Cost of $3. 2) Trader buys one call option and pays $300 [100 x $3 (premium cost)]. Selling a Call Next, the trader will sell the same quantity of options that's Out-of-The Money (OTM). 1) Trader writes (sells): XYZJan45 ($1) - One Option = 100 shares of XYZ stock - Strike Price $45/per share, expiring on 1/15 - Premium Cost of $1. 2) Trader sells one call option and receives $100 [100 x $1 (premium cost)]. Result: The trader is in the options market for $200 (Amount Paid $300-$100 Amount Received). Advantage and Disadvantage of Bull Call Spread Pluses: The upside to this type of strategy is that the investor gets into the options market at a discount. Instead of paying the full price for a call, he or she can get a $100 discount from the short sale. This is also good for investors who prefer to watch the movement of an unfamiliar option. The investor is also controlling their losses. The most that a trader can lose in the example above is what he or she paid to enter the market, which is $200. Minuses: The downside in using a bull call spread is that it limits an investor's profit. Even if the price of the call option in the above example soars, the investor will only receive a fixed profit, which depends on the strike price of the call and buy orders. Examples Using the Buy and Sell Orders Above: XYZ Market price declines to $38. Result: Both the buy and sell call orders will expire OTM and worthless. The investor will receive no profit from the investment, and his or her total loss is $200, what was paid to enter the market. XYZ Market price increases to $46. Buy Order Result: The option expires ITM. The trader exercises his or her right to buy 100 shares at $40, and pays $4000 to whoever wrote the option. Sell Order Result: The option expires ITM. The trader sells the 100 shares to cover the call, and receives $4500 from the buyer. Total result: Trader receives $4500 (from sale) - Pays $4000(from buy) - $200 (to enter market) = $300 profit. Choosing the Correct Strike Price Looking at the example above, one can see that the strike price plays a significant role in profiting from a bull call spread. Choosing strike prices farther away from market prices can produce larger profits for investors, but they also take on more risk, since the option may not expire ITM when it expires.

Traders who use a call backspread are betting that the market price of the underlying asset will go up substantially. The strategy involves buying two or more call options, and selling another, using the same underlying asset. Traders can decide which ratio works best for them, although the normal buy/sell ratio for this type of strategy is 2:1. Investors use a call backspread strategy to enter the market at low to no cost. Sometimes they even gain a credit, which they can use to offset any potential losses. At the same time, their returns are limitless, since the buy orders will always outweigh the sell orders. Thus, the maximum profit an investor can gain is infinite. How to Enter a Call Backspread A trader must perform two operations at the same time to enter a call backspread. Example: XYZ is trading at $43 (market price) Buying Two Calls First, a trader will need to buy two calls that are Out-Of-The-Money (OTM). 1) Call Option Available: XYZJan45 ($2) - One Option = 100 shares of XYZ stock - Strike Price $45/per share, expiring on 1/15 - Premium Cost of $2. 2) Trader buys two call options and pays $400 (200 x $2 (premium cost)). Selling a Call Next, the trader will sell a call that's In-The-Money (ITM). 1) Trader writes (sells) call option: XYZJan40 ($4) - One Option = 100 shares of XYZ stock - Strike Price $40/per share, expiring on 1/15 - Premium Cost of $4. 2) Trader sells one call option and receives $400 from the buyer. Result: The trader is in the options market, paying nothing to get in (Amount paid $400-$400 Amount Received). Advantage and Disadvantage of Call Backspread Pluses: The upside to this type of strategy is that there are no limits on the profit the investor can receive. If the market price of the underlying asset takes off, the investment will grow at the ratio implemented when entering the strategy, normally 2:1. Another advantage is that the cost of entering the market is either low to none, which depends on the difference between the two strike prices that the trader chooses when implementing the strategy. As a result, risk is limited. Minuses: The downside in using a call backspread is losing money when the price of the underlying asset falls. Losses start when the market price of the underlining asset is between the strike price of the sale order and the strike price of the buy order, plus the points necessary to cover the short. Examples Using the Buy and Sell Orders Above: XYZ Market price declines to $39. (OTM) Sell Order Result: The option expires OTM and worthless. Buy Order Result: The option expires OTM and worthless. Total result: The trader has no loss because he or she paid nothing to enter the market. If there was a credit in the account, the trader would keep it. If the trader paid more than he or she received to enter the strategy, the trader would lose that amount. XYZ Market price increases to $50. (ATM) Buy Order Result 1: The option expires ITM. The trader exercises his or her right to buy 200 shares at $45, and pays $9000 to whoever wrote the option. Sell Order Result: The option expires ITM. The trader uses 100 shares from the buy order to cover the call, and receives $4000 from whoever bought the option. Buy Order Result 2: The trader sells the remaining 100 shares at $50, market value and receives $5000. Total result: Trader receives $4000(from sale) - pays $9000 (from buy 1) + receives $5,000 (from buy 2) = $0 gain. Thus, the investment broke even when XYZ hit $50. XYZ Market price increases to $60. (ITM) Buy Order Result 1: The option expires ITM. The trader exercises his or her right to buy 200 shares at $45, and pays $9000 to whoever wrote the option. Sell Order Result: The option expires ITM. The trader uses 100 shares from the buy order to cover the call, and receives $4000 from whoever bought the option. Buy Order Result 2: The trader sells the remaining 100 shares at $60, market value and receives $6000. Total result: Trader receives $4000(from sale) - pays $9000 (from buy 1) + receives $6,000 (from buy 2) = $1000 gain. Choosing the Correct Strike Price In looking at the example above, one can see that the strike price plays a significant role in a call backspread strategy. If the trader had paid to enter the market, losses would occur when the market price of the underlying asset expires ITM for the sale order or below ATM for the buy order ($40-$50 respectively). Traders should choose strike prices that either gives him or her a credit or costs nothing when entering the market. Doing this will lower any potential loss if things go bad.

Traders who buy index calls are betting that the market price of the underlying asset will go up. The strategy involves buying a call that's associated with a stock market index. The index will play the same role as the underlying asset does in normal options trading. Investors settle their exercised options in cash, so there are no assignment of assets. When traders buy index calls, they enter the market at lower costs, which limits their risk. The most a trader can lose is the amount that he or she pays in premiums. At the same time, there is no limit to how much profit an investor can make, since the potential growth of any stock index is infinite. How to Buy Index Calls A trader buys an index call in the same way that he or she would buy a regular call option, except that the underlying asset is not just one stock but rather a collection of many. Example: GOOG, is valued at $400 The following At-The-Money (ATM) call index option is available. GOOG Jan 400($4.50) - One Option contract - Strike Price $400, expiring on 1/15 - Premium Cost of $4.50 Trader buys one index call option and pays $450 [$100 x $4.50 (premium cost)]. Result: The trader is in the options market for $450, and he or she can exercise the GOOG option if it's In-The-Money (ITM) when it expires. Advantage and Disadvantage of Buying Index Calls: Pluses: The upside to this type of strategy is that there are no limits to the amount of profit an investor can make. If the stock index's value takes off, the investment will grow, and the trader will exercise and settle for cash when the option expires. Another advantage is that the cost of entering the market is very low. As a result, the lower buying cost limits a trader's overall risk and exposure. Minuses: The downside in buying index calls is the investor loses money when the value of the stock index falls. Although, the most an investor can lose is only the amount that he or she paid in premiums to buy the option. Examples of Buying an Index Call Using the (ATM) Order Above: GOOG increases to $420 (ITM). Result: The value of the option expires at $420 and is ITM. The investor will exercise the index call, receiving $2000 from the writer. [$420 (market value) - $400 (strike price) = 20 x $100] The trader's profit will total $1550, after subtracting the $450 in premiums paid. GOOG stays at to $400 (ATM). Result: The value of the option expires at $400, and even though it is breaks even-ATM, it's still worthless. The investor will receive no profit from the investment, and their total loss is $450, what was paid to enter the market. GOOG declines to $380 (OTM). Result: The value of the option expires worthless at $380 and is Out-of-The-Money (OTM). The investor will receive no profit from the investment, and their total loss is $450, what was paid to enter the market. Choosing the Correct Strike Price In looking at the example above, the trader bought the index call with a strike price ATM for $400. Investors can also buy index calls OTM, which are less expensive but carry more risk. Alternatively, a trader who purchases a call index with a strike price ITM will pay more, but they will also have a greater chance that the option will expire ITM. Examples of Buying an Index Call with Strike Price (OTM): GOOG is trading at $400. GOOG Jan 500($1.50) - One Option contract - Strike Price $500, expiring on 1/15 - Premium Cost of $1.50 Trader buys one index call option and pays $150 [$100 x $1.50 (premium cost)]. Result: The trader is in the options market for $150, but GOOG must increase to more than $501 (25%) for the above option to expire ITM. Examples of Buying an Index Call with Strike Price (ITM): GOOG is trading at $400. GOOG Jan 300($7) - One Option contract - Strike Price $300, expiring on 1/15 - Premium Cost of $7 Trader buys one index call option and pays $700 [$100 x $7 (premium cost)]. Result: The trader is in the options market for $700. GOOG can decrease to $371 (-23%) and the option above will still expire ITM. Any price above $371 will lead to substantial profits.

Traders who use a bull put spread strategy are betting that the market price of the underlying asset will go up moderately or substantially. The strategy involves a selling put, and hedging it, by buying the same quantity of put options. The trader hopes that both options will expire Out-of-The-Money (OTM), allowing him or her to keep the premiums. Investors sometimes call a bull put spread strategy a credit spread, since premiums received from the put sale are larger than the cost of buying the put. Investors use this strategy to limit any potential losses. At the same time, the maximum profit an investor can gain is the amount of premiums the he or she collects. How to Enter a Bull Put Spread A trader must perform two operations at the same time to enter a bull put spread. Example: XYZ is trading at $43 Selling a Put First, the trader will sell a naked put that's In-The-Money (ITM). 1) Trader writes (sells) put option: XYZJan45 ($3) - One Option = 100 shares of XYZ stock - Strike Price $45/per share, expiring on 1/15 - Premium Cost of $3. 2) Trader sells one put option and receives $300 [100 x $3 (premium cost)]. Buying a Put Next, a trader will need to buy a put that's Out-Of-The-Money (OTM). 1) Put Option Available: XYZJan40 ($1) - One Option = 100 shares of XYZ stock - Strike Price $40/per share, expiring on 1/15 - Premium Cost of $1. 2) Trader buys one put option and pays $100 [100 x $1 (premium cost)]. Result: The trader is in the options market with a $200 credit in his or her account (Amount Received $300-$100 Amount paid). Advantage and Disadvantage of Bull Put Spread Pluses: The upside to this type of strategy is that the investor limits their losses. The most that a trader can lose will depend on the strike price of the put and buy orders. Minuses: The downside in using a bull put spread is that the investor's profit is also limited. The most that a trader can gain is what he or she collects in premiums after the buy and sell orders expire worthless. Examples Using the Buy and Sell Orders Above: Example: XYZ is trading at $43 XYZ Market price increases to $46. Result: Both the buy and sell put orders will expire OTM. The investor keeps the $200 credit in his or her account, collected from premiums when entering the market. XYZ Market price declines to $38. Sell Order Result: The option expires ITM. The trader buys 100 shares to cover the put, and pays $4500 to whoever bought the option. Buy Order Result: The option expires ITM. The trader exercises their right to sell 100 shares at $40, and receives $4000. Total result: Trader pays $4500(from sale order) - receives $4000(from buy order) + $200 (credit in account) = $300 loss. This amount is also the most the trader can lose on this investment. Choosing the Correct Strike Price Looking at the example above, one can see that the strike price plays a significant role in limiting losses from a bull put spread. Only expert traders should buy puts with strike prices closer to market prices when implementing a bull put spread strategy. Choosing an ATM buy order, instead of one that's OTM may reduce an investor's loss, but the person also takes on more risk, as strike prices closer from market prices, may not expire OTM.

A call order is one of two types of orders that an option trader can make (the other being a put order). The trader can either choose to buy a call option or sell one. Buyer: The call option buyer has the right to buy the underlying asset, but is in no way obligated to do so. The call option buyer can choose to either exercise his right to buy on or before the call option's strike date, or they can let the option expire. Seller: The call option seller (writer) has the obligation to sell the underlying asset at its strike price, if a buyer exercises their right on or before the option's expiration date. The seller receives a premium (option market price) from the buyer for taking this risk. Both buying and selling call options are high-risk investments, with traders who buy taking the higher gamble. A trader may ask, if call options are so risky, why do investors buy and sell them? The answer is in the return, because even though the risk is high, call options can give investors high profits when performed correctly. What Is a Call Option? A call option is a contract that's connected to an underlying asset, normally a stock or commodity. Every call option contract has a fixed price (strike price) that each trader must honor on or before a fixed date (strike date). The terms and responsibilities under the contract differ depending on whether the trader is the buyer or the seller. Buying a Call Traders who buy call options are betting that the market price of the underlying asset will go up. Call options carry a premium, which varies depending on price and how close the purchase is from the strike date. Usually, one call option contract gives the buyer the right to buy 100 shares of the underlying asset. A call buyer pays a premium for each share covered under the call contract. If the asset's market price exceeds the call option's strike price, the call buyer will exercise his right to buy the shares. If the market price is lower, they will just let the option expire, resulting in a loss in whatever they paid in premiums. Example: GE is trading at $48 (market price) 1) Option Available: GEJan50($5) = 100 shares of GE stock at $50/per share(strike price), expiring on 1/15 (strike date) with a premium cost of $5. 2) Call buyer has $5500 in their investment account. 3) Trader buys 1 call option at $500 (100 x $5 (premium cost)). Result one: GE hits $70. The call option buyer exercises their right to buy 100 shares at $50. Their total investment is $5,500 ($5000 shares + $500 premium). They immediately sell their 100 shares for $7000, resulting in $1500 profit (300%). Result two: GE hits $30. The call option buyer lets the contract expire, does not exercise their right to buy and loses the amount of premiums paid. In this example, the option buyer would lose $500. Selling a Call Traders who sell call options are betting that the market price of the underlying asset will go down. Call options carry a premium that goes directly to the seller. If a call buyer does not exercise their option, the call seller keeps both the asset and the premium. On the contrary, call option buyers who exercise the option, obligate the call seller to sell the underlying asset. There are two types of call sales. A covered call is a sale in which the seller actually owns the asset. Traders make naked calls when they do not own the underlying asset. Naked calls have the highest risk and only expert traders should carry out this kind of strategy. Covered Call A covered call is a win-win strategy for traders who have the capital to own the underlying asset. Covered call sellers make a profit when the market price goes up and buffer losses when it goes down, by writing the call option with a strike price higher than its market price. Example: GE is trading at $50 (market price) 1) Call seller has $5000 in their investment account and buys 100 shares of GE. 2) Call seller writes the option: GEJan52($2) = 100 shares of GE stock at $52/per share(strike price), expiring on 1/15 (strike date) with a premium cost of $2. 3) Call buyer buys the option and call seller receives $200 in premiums. Result one: GE hits $70. The call option buyer exercises their right to buy 100 shares at $52. The call seller sells at $5200 and receives $400 profit ($200 in premiums + $200 from price) Result two: GE hits $40. The call option buyer lets the contract expire. In this example, the option seller would keep the asset, keep $200 in premiums, but would suffer a $1000 loss from the asset's current market price. The total loss reduces to $800 when adding the premium. Naked Call Options This type of call option is one of the highest risks a trader can make. It involves writing a call on an asset that is not owned. The naked call writer will need to buy shares if the call buyer exercises the option. Example: GE is trading at $50 (market price) 1) Call seller writes the option: GEJan52($2) = 100 shares of GE stock at $52/per share(strike price), expiring on 1/15 (strike date) with a premium cost of $5. 2) Call buyer buys the option and call seller receives $500 in premiums. Result one: GE hits $70. The call option buyer exercises their right to buy 100 shares at $52. The call seller needs to buy 100 shares to cover the option and pays $7,000. They deliver the shares and receive $5,200 from the call buyer, resulting in a loss of $1,800. The total loss reduces to $1,200 when adding the premiums received at the beginning of the sale. Result two: GE hits $40. The call option buyer lets the contract expire. In this example, the option seller would keep the asset, and make $500 in profit from premiums. The lower a naked call seller's strike price deviates from the asset's market price, the higher premium the seller will receive, but if the buyer exercises the option, total loss also increases. NEXT: [thread=11599]Put Option[/thread]

To trade options, an investor must open an account with a brokerage house that has a seat on the trading floor of an option exchange. Traders can choose to open their account with a personal (full-service) broker, online (discount) broker or a broker that offers both services. Personal brokers offer traders more help, but they charge more in commissions and fees. Online brokers are cheaper but they only offer limited support. Some brokers offer both full and discount service, giving the trader a choice when placing their orders. A broker's quality of service depends on the broker themselves and varies throughout the industry. Personal Brokers Traders use a personal broker when they seek financial advice or need a human being to place a buy or sell order for them. Most traders do business with personal brokers by telephone. Personal brokers can guide an investor, who is new at trading options, in placing their orders correctly. They also can give a trader advice before placing orders, and they can help a trader come up with an investment strategy that fits their needs. Personal brokers charge three to five times more in commissions and fees than online brokers. Personal brokers are useful when traders do not have a computer or an internet connection available to place an order. Online Brokers Traders familiar or comfortable with option trading can place orders themselves using an online broker. Sometimes called home broker, this system provides a direct link between the options trader and the exchange floor when executing their buy and sell orders. The home broker is a do-it-yourself type system that does not give traders financial advice, but rather provides the tools for traders to find the information on their own. Discount brokers build a variety of tools into their home broker systems, which include real-time streaming, order entry windows, historical financial data indexes and real-time graphic analysis. Order execution speed and online sever availability depend on the chosen discount broker's quality of service. Broker Fees and Commissions All brokers, both personal and discount, charge commission fees. Traders add these fees into buying costs and deduct them from their profits. In other words, each time a trader places an order or uses personal broker services, the brokerage house charges a fee. A trader should consider commission fees when developing their investment strategies. Is Cheaper Better? Most traders think that the best option broker is the one that charges the lowest commission fees. Lower fees are great when an investor works with low margins, but they are worthless if the broker's quality of service is inferior. When finding the best options broker, traders should consider other factors that affect order handling, including server capability, speed of order transmission to the exchange floor and the overall user experience of the broker's online ordering system. Server Availability Online brokers use servers to handle their online traffic. Some servers are larger than others, and the home broker's service availability depends on the brokerage house's infrastructure. Low broker fees are not an advantage if the trader cannot place their orders when they want. Home Broker User Experience Traders need to place their orders fast and easy. Their home broker system should be easy to use, simple and straightforward. The system should offer the trader a single order entry window that gives them alternatives in placing their orders, which include placing stop orders, short selling, placing market orders, covering calls and placing limit orders. Order Execution Traders who buy and sell orders need their orders to execute. Once executed, the trader needs to feel at ease that their broker will guarantee the price executed on the order. Some home brokers do not guarantee that executed orders will have the best available bid-ask price available. The National Best Bid or Offer (NBBO) requires brokers to meet SEC requirements, which give traders the best-quality service. Options traders should look for discount brokers that exceed NBBO standards. NEXT: [thread=11554]Options Chains[/thread]

A margin requirement is the minimum balance a broker house requires an investor to have in their account when writing call or put options. The requirements vary depending on the broker and the terms agreed upon when opening the account. Every bank account has a balance and the balance increases when the owner makes deposits and decreases with withdrawals taken from the account. Investment accounts act in the same way except traders call their account balance "margin," because their broker uses it as collateral to cover their trades. Option traders can sometimes borrow money from the brokerage house to increase their margins or cover orders when they are short on cash. Borrowed margins have even stricter requirements, cost more when adding interest charges and can be called sooner by the broker, if the investment loses significant value. How to Calculate Margin Every brokerage house has different margin requirements. In general, brokers only let traders write options on a 10%-20% margin (balance in the investment account). If the investment does well their margin increases. If the trade goes bad, the brokerage house sells the option (margin call). A margin call occurs the instant an option drops below the trader's margin requirement, covering the trade and minimizing loss. Margin requirements fluctuate as the market price moves up and down from the strike price and the requirement increases when short selling. Initial margin requirements are: 100% of option proceeds, plus 20% of underlying security value less out-of-the-money amount, if any minimum requirement is option proceeds plus 10% of the underlying security value proceeds received from sale of call(s) may be applied to the initial margin requirement after position is established,*ongoing maintenance margin requirement applies,*and an increase*(or*decrease) in the margin required is possible For simplicity, assume that GE's market price is at $20 in all the examples below. Selling a Call (Shorting) Example 1) Investor wants to sell (write) 10 GE-January call options, expiring on 02/15 with a strike price of $20 for $1 Result: The option trader would need 20% of the total market value of the securities in case the buyer chooses to exercise the option. This amount works out to $5,000 but since he was paid $1,000 for this option the trader only needs $4,000 in his account to place this call order. Selling a Put (Shorting) Example 1) Investor wants to sell (write) 10 GE-January put options, expiring on 02/15 with a strike price of $20. (Symbol: GE JAN20). Result: Again, the option trader would need 20% of the total market value of the securities in case the buyer chooses to exercise the option. This amount works out to $5,000 but since he was paid $1,000 for this option the trader only needs $4,000 in his account to place this call order. Borrowing on Margin Sometimes an investor needs more money to make a trade. When the trader has a good credit standing, they can ask their broker to lend them the funds needed to place an order. The broker house charges interest on top of the loan. Profits from borrowing on margins decrease significantly because the trader splits gains with the broker house. The borrower's risk also increases because the broker house will always get paid back, if the investment goes bad. Example 1) Call option available: 10 GE-January call options, expiring on 02/15 with a strike price of $20, and premium of $2. (Symbol: GE JAN20) 2) Investor wants to buy 10 call options at $2 = $2,000. 3) Investor only has $1,000 on margin and asks his broker to lend them $1,000 at 5% interest. Result: The margin requirement is $1,000. If the option's market value decreases $1,000, the broker will call the option and sell it immediately to cover the loan. The investor's account will hit $0, and they will need to deposit more funds to make future trades and to pay interest due to the broker. Margin Calculator Provided by CBOE is this useful online tool that calculates the exact margin requirements for a particular trade. NEXT: See our Options Forum

i'm newbie when it comes to active\day\swing\trend-trading but i've been trading options (primarily for income) for a little bit. i'm starting this thread to share some of my option trades and to record how i'm doing on them. hopefully this will help me cover the cost of learning how to day-trade! :haha: most of my trades are *selling* put options on big safe companies with dividends, with the intent the option expires worthless and i collect the premium. if it doesn't expire then i get to buy the stock at a discount. Disclaimer: i am not an investment professional and this is NOT investment advice! first trade abbott labs (ABT) - sell, to open, abbott labs (ABT) august $50 puts for at least $0.9. - if options expire worthless, i get 9% return on my 20% margin requirement for 2 months work - if it i'm obligated to buy the stock at $50, and taking into account the $0.9 premium, i'm buying the stock at 4.7% discount - ABT pays a 3.7% dividend, has a strong balance sheet, and is a large diversified health care company just ready for the onslaught of baby-boomers -mslk

I came across this guide, 25 Free Options Strategies from the CME Group, http://bit.ly/nnqDEC Has anyone used it?

I have experience with pair trading, but I heard some online companies now allow you to trade Pair Options. If anyone knows where I can trade Pair options please let me know? :cheers:

Hi So basically I'm fairly new to futures trading, I've been trading options for about two years now. Mostly I stick to trading equities. But I've noticed that if the DOW has a significant down or up day the Nikkei follows suit on the next day (that night in America). Now of course this can only happen in Japan on a Tuesday, Wednesday, Thursday, and Friday. So basically what I want to do is trade options or futures on the days that I identify this trend. I'm looking for the best way to capitalize off this and I'm having a bit of trouble figuring it out. I would need to purchase these options/futures at the tail end of the American trading day and before the markets open in Japan, does anyone know how I could achieve this? Any and all help greatly appreciated.