Options trading strategies

Benefits

• May generate income without the initial investment of establishing a stock position
• The potential to purchase the stock at a strategically targeted price
• The premium received is kept, regardless of whether the option is assigned

Risks

• If the option expires due to the underlying stock price increasing, gains will be limited to the premium received
• Losses are only reduced by the amount of premium received
• Short option could be assigned at any time, obligating you to buy the underlying asset, potentially above the current market price

Benefits

• May provide downside protection on underlying assets you own
• Gives you the right but not the obligation to sell the underlying stock at the strike price until expiration

Risks

• The time frame is limited, and the puts may eventually expire and become worthless
• The value of options can move independently of the underlying stock, eroding the value over time

Benefits

• May provide downside protection on underlying assets you own at little to no net cost, excluding fees, commission, and per-contract fees
• If the underlying price goes down, the protective put gives you the right to sell the stock at the strike price

Risks

• Creates the obligation to sell the underlying stock at the strike price of the call, which limits the upside profit potential
• If your short call options are in the money, you could be assigned at any time
• Stocks that pay dividends can be especially vulnerable to early assignment

Benefits

• The ability to potentially profit when the underlying asset makes a large move in either direction
• Your risk is defined; the most you can lose is the cost of the options

Risks

• Because multiple contracts are involved, the cost of the options can be higher than with single-leg strategies
• If the stock doesn't move, you risk losing the premium
• In order to cover the cost of the two legs of the trade, the stock must make a larger move for the trade to be profitable

Benefits

• Your risk is usually defined; the maximum potential loss is established from the outset of the trade
• Less capital intensive than establishing a long or short position in the underlying stock

Risks

• Your risk is defined from the outset, but so is your maximum potential gain
• The short leg of the vertical spread may be subject to assignment at any time before expiration
• If held to expiration, you may not know until the next trading day if the short option was assigned or not; this could result in an unanticipated long or short stock position