Call and Put Option Strategies
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home | Free Options Trading Videos | Call and Put Option Strategies

Call and Put Option Strategies

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There are a variety of strategies that can be done using both calls and puts, or a combination of the two. The strategies chosen by investors will depend on what they are trying to accomplish on their particular investment or trade.

One of the biggest reasons that investors use options is for the purpose of hedging. Options may actually be used to help an investor protect their investments. For instance, if an investor purchased shares of stock that they expect to rise, there will be some uncertainty as to whether those shares will actually rise or fall. Therefore, one way that an investor can hedge or protect their investment in those shares is by purchasing a put option on those underlying stock shares.

Should the price of the investor's stock shares go up, even though the put option will expire worthless, the investment that the individual has in the actual stock shares will have risen – so they have still made a profit, while hedging their bet.

Conversely, should the price of the investor's stock shares fall, then even though the investment in the stock has fallen, the investor's losses will be reduced by the put option that they have purchased. This is because the value of the put option will be worth more as the price of the underlying stock falls.

These types of hedging strategies are typically used when stock shares are somewhat bullish. This would occur when an investor feels that the price of a stock may rise, yet they know that there is also the possibility that the share price could fall as well.

Another strategy that can be used by investors is the covered call technique. This strategy works with investors to help them enhance the profit potential of a stock that they already own, and it also provides limited downside protection against an adverse stock movement.

Investors typically use this method when they believe that the stock price will trade up slightly or will stay in a tight range for a period of time and they plan to hold on to the stock for a long period of time.

With this strategy, the investor either owns or will purchase a stock that is trending flat or is going up in value. The investor will then sell a call option on that stock and collect a premium amount for selling, or writing, that call option.

If the stock price goes up, the investor will actually enhance their profit based on the premium that was received from the option. And, if the price of the stock does not move at all – or only moves a slight amount – then the investor can also profit from the premium that was received from the sale of the call option.

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