Power Up with Multiple Option Strategies.
Trading Options Online.
Scottrade provides option trading tools and comprehensive online education to support your experience level and trading goals. You can trade options from any of our platforms.
Option Tools & Technology.
Research your tactics with the Option Ideas tool from Recognia.
Access a fully customizable option chain that offers multiple expirations in the window.
Compute potential profit and loss by analyzing scenarios to explore how prices are affected by market forces.
Option Strategies.
Take Action.
Enhance your ability to react to changing market conditions with a variety of option strategies available at Scottrade. The following option strategies are available on all Scottrade В® trading platforms:
Income strategies: sell cash-secured puts and covered calls Growth strategies: buy puts and calls Speculative strategies: sell uncovered puts.
Option Trading Support.
Insight When You Need It.
In addition to the support we provide for all traders, we offer specific option-related help.
Options can be used for a variety of purposes. Check out a comprehensive overview.
Scottrade’s Active Trader Group can provide one-on-one support to active traders. Talk to your Investment Consultant for more information.
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By clicking this link, you understand you will be redirected to the Option Industry Council, a third-party website operated and maintained by the Option Industry Council. Scottrade and the Option Industry Council are not affiliated. The Option Industry Council’s website contains information that may be of interest or use to the reader. Third-party websites, research and tools are from sources deemed reliable; however, Scottrade does not guarantee accuracy, completeness or timeliness of the information, is not responsible for statements, offers or products issued and makes no assurances with respect to the results to be obtained from their use. No information presented constitutes a recommendation by Scottrade or its affiliates to purchase any product or instrument discussed therein or engage in any specific strategy. Please research any product or service carefully before purchase.
A protective put strategy raises the breakeven on the underlying by the amount paid for by the put. If the underlying stays above the strike price you can lose the entire premium upon expiration.
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How to Trade Options.
Learning how to trade options is an important step in broadening your investing strategy.
To learn how to trade options successfully, you first need to understand what options are and how they work. A stock option is a contract that allows its purchaser to either buy or sell an underlying stock at a specific price on or before a specific date. An option to buy a stock is called a "call option," and an option to sell a stock is called a "put option," and the specific price is known as the "exercise price" for that option.
The graph below shows the potential payoff and profit curve at expiration for a person buying a call option. Note that the buyer only turns a profit if the stock closes above the strike price at expiration and the stock closes far enough above the strike price to cover the premium paid to the seller of the options contract and any commissions involved in the transaction.
Source: Wikipedia user Gxti.
On the flip side, the graph below shows the potential payoff and profit curve at expiration for a person buying a put option. In this case, the buyer only turns a profit if the stock closes below the strike price at expiration and the stock closes far enough below the strike price to cover the premium paid to the seller, as well as any commissions.
Source: Wikipedia user Gxti.
Most options are standardized contracts based on 100 shares of the underlying stock. Options are only available on a stock if the company behind that stock has a large enough market capitalization and if market makers think there will be enough trading volume from market participants.
Put Option Implication.
Call Option Implication.
You purchase the right to sell the underlying stock at the exercise price on or before the expiration date.
You purchase the right to buy the underlying stock at the exercise price on or before the expiration date.
You surrender the right to sell the underlying stock at the exercise price on or before the expiration date.
You surrender the right to buy the underlying stock at the exercise price on or before the expiration date.
You take on the obligation to buy the underlying stock at the exercise price on or before the expiration date.
You take on the obligation to sell the underlying stock at the exercise price on or before the expiration date.
You relieve yourself of the obligation to buy the underlying stock at the exercise price on or before the expiration date.
You relieve yourself of the obligation to sell the underlying stock at the exercise price on or before the expiration date.
You exercise the right you purchased to sell the underlying stock at the exercise price on or before the expiration date.
You exercise the right you purchased to buy the underlying stock at the exercise price on or before the expiration date.
The person on the other side of your position exercises their right to sell you the underlying stock at the exercise price on or before the expiration date.
The person on the other side of your position exercises their right to buy the underlying stock from you at the exercise price on or before the expiration date.
The option contract is no longer in force, and you no longer have the contractual right to sell (if you had bought the put) or the obligation to buy (if you had sold the put) the underlying stock at the strike price.
The option contract is no longer in force, and you no longer have the contractual right to buy (if you had bought the call) or the obligation to sell (if you had sold the call) the underlying stock at the strike price.
Table by author.
Options prices: What do you get or give up for your money?
A handful of key factors drive options prices. Two of the biggest are the price of the underlying stock relative to the exercise price of the option and the amount of time left until the option expires. The portion of the option price that's driven by the difference between the underlying stock price and the exercise price is known as the "intrinsic value" of the option. The portion that's driven by all other factors -- including time to expiration -- is known as its "time value."
For example, imagine a company whose shares trade at $51 per share. A call option on that stock with a $50 strike price that expires three months from now might trade at $2.50 per share. Of that $2.50, $1 represents the intrinsic value in the option, and the other $1.50 represents the time value. On that same stock, the $50 put option expiring at the same time might only trade at $1.50, as it has no intrinsic value with the underlying at that price but still has time value.
An option's intrinsic value changes as the underlying stock price changes. An option's time value generally shrinks as options get closer to expiration. The time value also changes based on the difference between the underlying stock price and the exercise price (the closer the two are, the higher the time value). The other major factors that drive an option's time value are the volatility in the underlying stock price movement, the dividend the underlying company pays, and prevailing interest rates.
There's a complicated mathematical equation known as the "Black-Scholes" formula that attempts to model what an option should be priced at based on those key factors. The Black-Scholes formula does its job well, but you don't need to master the mathematics of it; online calculators are plentiful.
Options leverage: The knife that cuts both ways.
Two key reasons people trade options are for speculation and for hedging (i. e., protecting the rest of their portfolio from unfavorable moves). Both of those tactics rely on the leverage options provide. For example, using the same call option on the stock described above, a $250 investment in the call options would give you exposure to $5,100 worth of the underlying stock.
If the stock closed at $55 per share at expiration, your $250 investment would be worth $500, doubling your money (before commissions) in the space of three months. Meanwhile, if you bought 100 shares of the underlying stock for a total of $5,100, then the move from $51 to $55 would net you a gain of $400 -- about 7.8%.
On the flip side, however, if the stock dropped to $50 at expiration, your call option would expire worthless, and you would lose 100% of your option investment. If you owned 100 shares instead of the call, that move would represent a $100 loss -- or about 2% of your $5,100 investment.
That leverage magnifies the impact of any moves in the underlying stock price. Combine that leverage with the fact that options expire, and it means that if you're going to speculate with options, you need to be right not only about what will happen, but when it will happen as well. Be extremely careful with the leverage involved, as you can easily lose more than 100% of what you invest in an options transaction.
Options trade like stocks -- but you need additional permissions.
Thanks in large part to the additional risks involved in options, you'll need to fill out a more complex application with your broker to trade options than you would to simply purchase stocks. Because of that risk of losing more than 100% on an investment, options brokers have multiple levels of trade permissions. The riskiest of the strategies are generally available only to experienced options traders with both margin accounts and the highest options-trading permissions.
Once you have an appropriate level of permissions from your broker, the mechanics of trading an option are very similar to the mechanics of buying or selling a stock. Just be sure to remember that a stock option derives its value from the underlying stock and that the leverage and the expiration date add additional risk. With that in mind, you'll be better prepared to balance the risks with the potential rewards and develop an options strategy that might work for you.
Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Chuck Saletta has been a regular Fool contributor since 2004. His investing style has been inspired by Benjamin Graham's Value Investing strategy. Chuck also can be found on the "Inside Value" discussion boards as a Home Fool.
How to Trade in Options Online.
Investing Online For Dummies®, 7th Edition.
One way to invest money online is to buy options. If you own an option, you have the right, but not the obligation, to buy or sell an investment, including shares of stock by a certain preset time in the future. Options can be extremely powerful in the right hands, and they can either help you boost your returns or reduce your risk, depending on how you use them.
If used prudently and safely, options can remove perils in the way of your financial goals. But if abused, misunderstood, or used recklessly, options can blow your financial plan to smithereens.
When you own an option, you have the power to make someone follow through on a trade for an underlying asset, such as a stock, no matter what happens to the price. Options expire on the third Friday of every month.
Two types of options exist:
Calls give their owners the right to buy a stock at a certain price at a certain time (in the future. One call contract gives you the right to buy 100 shares of the underlying stock.
Puts give their owners the right to sell a stock at a certain price at a certain time in the future. One put contract gives you the right to sell 100 shares of the underlying stock.
The real beauty of call and put options kicks in because you can either buy or sell them to other investors. That gives you four distinct strategies:
Buying a call: When you buy a call, you have the right to force someone to sell you the stock at the exercise price you agreed upon ahead of time. You make money on a call when the stock price rises above the exercise price. This strategy is for investors that are convinced a stock will rise and want to bet big. Buying a call isn’t free. You must pay the seller for the option, in the premium .
Selling a call: When you sell a call, you’re on the other side of the option strategy of buying a call. You get paid the premium and pocket the money. If the stock falls, you keep that money free and clear. But if the stock rises, you’re in trouble because you’ve agreed to sell the stock for the lower price.
You should never sell a call unless you know what you’re doing. If you sell a call and don’t own the underlying stock, that’s called writing a naked call . If the stock rises, your losses are unlimited because in theory the stock could rise hundreds of points.
If a call sounds like something you’d like to trade, here are places online where you can find out more:
When you buy a put, you have the right to make someone buy a stock from you for a prearranged price. You’re betting that the price of the underlying stock will fall. And like buying a call, it lets you make a big gamble with little up-front money. It’s another way to bet against a stock, similar to shorting a stock.
This strategy places you on the other side of the person who is buying the put. When you sell a put, you’re usually betting that the price of the underlying stock will rise. But you might also sell a put if you’re willing to buy the stock at the current price but think it might go lower in the short term. That way, if the stock does fall, you must buy the stock at the higher exercise price but get to keep the premium.
Options Basics Tutorial.
Nowadays, many investors' portfolios include investments such as mutual funds, stocks and bonds. But the variety of securities you have at your disposal does not end there. Another type of security, known as options, presents a world of opportunity to sophisticated investors who understand both the practical uses and inherent risks associated with this asset class.
The power of options lies in their versatility, and their ability to interact with traditional assets such as individual stocks. They enable you to adapt or adjust your position according to many market situations that may arise. For example, options can be used as an effective hedge against a declining stock market to limit downside losses. Options can be put to use for speculative purposes or to be exceedingly conservative, as you want. Using options is therefore best described as part of a larger strategy of investing.
This functional versatility, however, does not come without its costs. Options are complex securities and can be extremely risky if used improperly. This is why, when trading options with a broker, you'll often come across a disclaimer like the following:
Options involve risks and are not suitable for everyone. Option trading can be speculative in nature and carry substantial risk of loss. Only invest with risk capital.
Options belong to the larger group of securities known as derivatives. This word has come to be associated with excessive risk taking and having the ability crash economies. That perception, however, is broadly overblown. All “derivative” means is that its price is dependent on, or derived from the price of something else. Put this way, wine is a derivative of grapes; ketchup is a derivative of tomatoes. Options are derivatives of financial securities – their value depends on the price of some other asset. That is all derivative means, and there are many different types of securities that fall under the name derivatives, including futures, forwards, swaps (of which there are many types), and mortgage backed securities. In the 2008 crisis, it was mortgage backed securities and a particular type of swap that caused trouble. Options were largely blameless. (See also: 10 Options Strategies To Know .)
Properly knowing how options work, and how to use them appropriately can give you a real advantage in the market. If the speculative nature of options doesn't fit your style, no problem – you can use options without speculating. Even if you decide never to use options, however, it is important to understand how companies that you are investing in use them. Whether it is to hedge the risk of foreign-exchange transactions or to give employees ownership in the form of stock options, most multi-nationals today use options in some form or another.
This tutorial will introduce you to the fundamentals of options. Keep in mind that most options traders have many years of experience, so don't expect to be an expert immediately after reading this tutorial. If you aren't familiar with how the stock market works, you might want to check out the Stock Basics tutorial first.
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