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Simple call option strategies

Simple call option strategies


Still, if a call option is the ability to buy shares later on, what&apos s the xA5 difference between a call and put option?

Options Trading Strategies: A Guide for Beginners

Why use it: Investors often use short puts to generate income, selling the premium to other investors who are betting that a stock will fall. Like someone selling insurance, put sellers aim to sell the premium and not get stuck having to pay out. However, investors should sell puts sparingly, because they’re on the hook to buy shares if the stock falls below the strike at expiration. A falling stock can quickly eat up any of the premiums received from selling puts.

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While there are lots of different call option strategies, here are some of the most used or simplest strategies. xA5

A put option is the option to sell the underlying asset, whereas a call option is the option to purchase the option. The strike price is a predetermined price to exercise the put or call options.

A short call (also called a naked call ) is generally a good strategy for investors who are either neutral or bearish on a stock. However, it is often considered a more risky strategy for individual stocks, but can be less risky if performed on other securities like ETFs, commodities or indexes. xA5

If the price of the underlying asset during expiration is same as the strike price of the bought call and put, the spread loses money.

Well, call options are essentially financial securities that are tradable much like stocks and bonds - however, because you are buying a contract and not the actual stock, the process is a bit different. When you are buying a call option, you are essentially buying an agreement that, by the time of the contract&apos s expiration, you will have the option to buy those shares that the contract represents. For this reason, what you are paying is a premium (at a certain price) for the option to exercise your contract. xA5

In a butterfly spread strategy, there are three strike prices. Two calls are bought – one ITM and one OTM. Two ATM calls are sold.

However if the stock is above $, the final value of the spread would be less than the $ paid, and the trade would have made a loss.

One of the benefits of a vertical spread is that it reduces the break-even point for your strategy, as well as eliminating time decay (because, even if the underlying stock price stays the same, you will still break even - not be at a loss). However, because the vertical spread generally bets on the price of the underlying security staying within a certain range, it has limited profit potential, so it may not be the best option if you are very bullish on a stock. xA5

Essentially, a long call option strategy should be used when you are bullish on a stock and think the price of the shares will go up before the contract expires. For example, if you bought a long call option on a stock that is trading at $99 per share at a $55 strike price, you are betting that the price of the stock will go up above $55 (maybe to trade at around $58 per share). In this particular example, the long call you are buying is out of the money because the strike price is higher than the current market price of the stock - but, because it is out of the money, it will be cheaper. This is a good strategy if you are very bullish on a stock and think it will increase significantly in a set period of time.


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