To calculate your total gain though, add the $1 premium you. If youre planning to hold the underlying shares anyway, selling covered calls can be a way to help generate income from the premiums you receive (aka to monetize your holdings). Youd reach your maximum potential gain if the price of the underlying stock fell to $0, which is theoretically possible but highly unlikely. It might make sense to buy only a call if you think the stock price will increase (i.e., you have a bullish outlook) or buy only a put if you think it will fall (i.e., you have a bearish outlook). Multiply this by the 100 shares you own, and this comes to -$1,000. Assuming all other factors are constant, a call option with a higher strike price typically involves a greater risk of loss than a call option with a lower strike price. Lets say MEOWs stock price closes at $125 on the calls expiration date. Another reason you might exercise a call or put is if you cant sell it for its intrinsic value (the difference between the stock price and the strike price). If that happens with PURR, your loss would be $43 per share ($0 - $45 + $2). This would free up your shares, allowing you to potentially: sell another call, keep holding the stock, or sell your shares. First, some options may not be as liquid as others. Lets say you expect stock in the fictional PURR company, which is trading at a price of $50 a share, to stay relatively flat or increase in the near future. If you want to either sell or exercise the option, you must do so by this date. Buying a call option (aka a long call) means opening a contract that gives you the right, but not the obligation, to buy shares of a stock at a certain price (the strike price) up until a set date (expiration date). You will lose this amount if the put expires worthless, which should happen if the stock price doesnt drop below the strike price before expiration. But theres a tradeoff You give up the potential to profit if the stock price soars above the strike price. You can sell or exercise the long put, while the long call should expire worthless. By comparison, if you had only bought and held 100 shares, the value of your stock wouldve increased by $2,000 that is, ($130 - $110) * 100 shares.

There are typically two main reasons to use this strategy: To potentially buy a stock you would like to own for less than its prevailing market price, or to earn additional income through the premium you receive by selling the contract (aka monetizing uninvested cash). If you sell the option, your potential gain per share is the difference between the strike price and the stock price, minus the premium ($95 strike price - $90 stock price - $1 premium = $4). If you buy a put, you generally benefit when volatility increases, because the value of your put should also increase, assuming all other factors are constant. If the stock drops below $94, you have the potential to profit. If the stock price is below the strike price at expiration, your call will likely expire worthless. This is the price at which youre required to sell your shares if the call is assigned. You can sell or exercise the long call, while the long put should expire worthless. In this case, youll lose the premium you paid for it. Supporting documentation for any claims, if applicable, will be furnished upon request. Volatility, a measure of how much and how quickly a stock price changes, can also affect your position. You pay a $1 premium ($100 total) to buy a put option. If the options contract represents 100 shares, the most you could gain is $9,400. Volatility, a measure of how much and how quickly a stock price changes, can also affect your position. If the stock price ends up staying at or above the strike price before expiration, the option should expire worthless and you get to keep the premium you received for the put. Since this is above the strike price of $125, the call is assigned, and you are obligated to sell your shares for $125 each. a covered call if you think a stock price will stay relatively stable or rise somewhat in the near future (i.e., you have a neutral-to-bullish outlook). So for a contract of 100 shares, you would lose $800. __Premium: __This is the price you pay to buy the put. When you buy a put, you expect that the value of the put will rise as the price of the underlying stock drops (though not necessarily dollar-for-dollar), before the expiration date. When this happens, you would realize your maximum potential loss, which is the premium you paid upfront. If you sell more covered calls, the total premium you receive is higher. The premium you received for the call can slightly offset your losses. If the stock price closes below the strike price on the expiration date, the put will likely be assigned, in which case you would buy shares at the strike price and keep the premium you received for the put. In exchange for this right (known as the ability to exercise the option), you pay an upfront cost (the premium). Learn more about early assignments, You can learn more about potential edge cases regarding corporate actions. Since this is at the strike price, the call should expire worthless. You also received a $1 premium per share, or $100 total, for selling the call. Selling a cash-covered put option (aka writing a cash-secured short put) means opening a contract where you have the obligation to buy shares of a stock at a certain price (the strike price) up until a set date (expiration date), and you already have the cash to meet your obligation (aka its cash-covered). If that happens, exercising it and then selling shares might be the only way to fully realize your potential gains. This is especially likely to happen before ex-dividend dates, the last day by which you can buy a stock in order to be eligible to receive dividends on the shares. One reason to use this strategy is to earn additional income on stocks you own. A straddle is composed of a long call and a long put at the same strike price, meaning you have the right to buy and sell shares at the same strike price. Thats because the stock would have to rise more for the call to become profitable. Instead of exercising a call, you could choose to sell it anytime before the expiration date to try to realize gains or prevent further losses. if the stock price falls all the way to $0. Youll experience this maximum loss anytime the stock price is at or above the strike price at expiration. is composed of a long call and a long put at the same strike price, meaning you have the right to buy and sell shares at the, is also composed of long call and put options, but the. Premium: This is the money you receive upfront for selling the put. Your gain per share is $15, or the strike price ($125) minus the price you, for the stock ($110). You could consider. Your maximum potential gain is limited to the difference between the strike price and the stock price, plus the premium you received. Like any stock owner, you risk losing the entire value of the sharesexcept when you sell a covered call, you would keep the total premium you received upfront. Depending on your position, its possible for you to lose the principal you invest, or potentially more So, it can be helpful to learn more about the different strategies before diving in. Multiplying by the number of shares you own (100), this comes out to $1,500. If you sell the put option, your potential gain per share is the difference between the puts strike price and the stock price, minus the premium ($90 strike price - $80 stock price - $5 premium = $5 per share). Your potential gain is theoretically infinite, while your risk of potential losses is limited to the premium you paid. Meanwhile, buying a put gives you the right, but not the obligation, to sell shares of a stock at the strike price by the expiration date. If that happens with PURR, your. Instead of exercising a put, you may sell-to-close the position anytime before the expiration date to try to realize gains or prevent further losses. Also, as the stock price rises, the value of your short call position declines. What can happen next? Your maximum potential loss is the total premium you pay upfront for the options. the option, your potential profit per share is the difference between the sale price and the premium you initially paid to enter the long call. Before you begin trading options, it's worth taking the time to identify an investment strategy that makes sense for you. If your option isnt very liquid, it can be hard to buy it back for its intrinsic value. If the stock closes at the higher breakeven point on the expiration date, you neither gain nor lose money. In this case, thats $2 per share, or $200 total. You can learn more about potential edge cases regarding corporate actions here. You should realize the maximum. On the other hand, the stock price could drop to $0, which could also yield significant gains for the straddle or strangle holder. You might also sell-to-close if you dont own enough shares to exercise the contract. Instead, say the stock price rises to $120. Lets say you expect stock in the fictional PURR company, which is trading at a price of $50 a share, to stay relatively flat or increase in the near future. You would then have the possibility of writing another cash covered put, depending on the amount of cash you have available to be held as collateral. Typically, premiums for straddles and strangles are higher (i.e., the options cost more) when implied volatility is higher. Exercising an option might make sense if you have the necessary collateral (either cash or shares) to buy or sell the stocks at the strike price. Traders can avoid this by closing their position before the end of the regular-hours trading session the night before the ex-dividend date. Lets see what happens if the stock doesnt move as you expected. Since you expect MEOW shares to rise, you decide to, a $2 premium per share (or $200 in total) to. When buying a put, lower strike prices typically come with a higher risk of losses, assuming all other factors are constant. If you sell the call option, your potential gain per share is the difference between the stock price and the calls strike price, minus the premium ($120 stock price - $110 strike price - $5 premium = $5 per share). If the stock closes at the breakeven point on the expiration date, you should neither gain nor lose money. Of course, you can also choose to do nothing and let the put option expire worthless. than the put option. You might consider selling a covered call if you think a stock price will stay relatively stable or rise somewhat in the near future (i.e., you have a neutral-to-bullish outlook). When you open a straddle or strangle, you have two choices before the expiration date: Exercise one of your options or sell them. If a trader is assigned on the short call option, the trader will be obligated to sell their shares of stock at the covered calls strike price. Assuming all other factors are constant, a call option with a higher strike price typically involves a greater risk of loss than a call option with a lower strike price. The more contracts you buy the greater your exposure to potential gains and losses on the position. If you sell more cash-covered puts, the total premium you receive is higher. That means the premium might not always correspond to price changes in the underlying stock. Selling a covered call means opening a contract that gives you the obligation to sell shares of a stock you already own, at a certain price (the strike price) up until a set date (expiration date). This is the maximum potential gain on this trade, even if the stock price increases further. Heres some lingo to describe how your straddles and strangles are performing relative to the stock price. Supporting documentation for any claims, if applicable, will be furnished upon request. For the same reason, the premium is likely to be higher for options with later expiration dates. But a call can be, early, too. Keep in mind, this is your maximum potential gain in this example. Your maximum potential gain is unlimited, since the stock price could theoretically rise to any number. MEOW falls to $100 (aka out-of-the-money). You might also sell your options if you dont have enough assets to exercise them. Even though you receive more upfront, theres also more time for the stock to move below the breakeven point. Heres some lingo to describe how your long call option is performing relative to the stock price: You might consider buying a call if you seek to benefit from an upward movement in a stock price (i.e., you have a bullish outlook), without actually owning the underlying shares.

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