Basic Options Strategies
A long call gives you the right to buy the underlying stock at strike price.
Calls may be used as an alternative to buying stock outright. You can profit if the stock rises, without taking on all of the downside risk that would result from owning the stock.
It is also possible to gain leverage over a greater number of shares than you could afford to buy outright because calls are always less expensive than the stock itself.
There are two potential outcomes when a long call is taken:
- The stock falls below the strike price of the call and the call option expire worthless.
- The stock trade above the strike price and either
- exercise the option and buy the stock at the strike price and profit from the higher current market
- close out the long call position in a profit.
Long Call Trade Example
The trade was the Apple (AAPL) January 8th $110 Long Call (AAPL US 01/08/21 C110). You paid $139 when you long the call and, at expiration, the option was in the money. The seller is obligated to sell the stock to us on Jan. 8, 2021, or you may close the long call position in a profit.
Below are the details of the trade broken down step-by-step.
A long put gives you the right to sell the underlying stock at strike price.
Long put can be used as an alternative to short stock.
A long put gives you the right to sell the underlying stock at strike price. Puts can also be used to help protect the value of stocks you already own. These are called protective puts.
There are two potential outcomes when a long put is taken:
- The stock trades above the strike price of the put and the put option expire worthless.
- The stock fall below the strike price and
- exercise the option and sell the stock at the strike price and profit from the lower current market
- close out the long put position in a profit.
Long Put Trade Example
The trade was the Apple (AAPL) March 19th $130 Long Put (AAPL US 03/19/21 P130). You paid $150 when you long the put and at expiration, the option was in the money. The seller is obligated to buy the stock from us on Mar. 19, 2021, or you may close the long put position in a profit.
Below are the details of the trade broken down step-by-step.
A covered call strategy involves selling an option to collect premium as income.
For this strategy you will need to have the underlying stock before executing the strategy.
Selling a call obligates you to sell 100 shares of a stock, which would be a bad idea if you don’t already own the stock. After all, you’d have to go out and buy 100 shares on the open market and then sell them back to the option buyer.
But if you already own shares of the underlying stock, you wouldn’t have to buy shares to sell to the call buyer. The shares you already own would “cover” the call you sold, hence the term “covered call.”
Covered calls are ideal for generating income on stocks you already own. Rather than letting the stocks sit idle in your equity account, it can be used to generate extra income by doing covered calls on top of also profiting from the increase in price of the underlying stocks. Stocks with high volatility (such as Tesla, Alibaba,) are great with generating more income due to the volatility priced into the option premium. This strategy can be utilise to generate constant income by rolling forward on the covered call contracts (ie. Extending the expiry date). Do take note if the covered calls expired ITM, the underlying needs to be delivered at the exercise price.
There are two potential outcomes when selling a call option:
- The stock rises past the strike price and the call seller is obligated to sell 100 shares of the stock for the strike price.
- The stock does not rise past the strike price and the call expires worthless, allowing the seller to keep the entire premium. Most of the time, we will buy back a call write that is out of the money and has lost most of its value.
Covered Call Trade Example
(1)The trade was the Microsoft (MSFT) January 18th $100 Covered Call. You earned $290 when we sold the covered call and, at expiration, the call expire worthless if MSFT trade below $100.
Below are the details of the trade broken down step-by-step. The trade was a covered call trade in Microsoft with an expiration date of Jan. 18, 2019. We expected the stock stay below $100 through expiration.
(2) The trade was the Microsoft (MSFT) January 18th $100 Call Write. You earned $290 when you sold the covered call and, at expiration, the option was in the money.
The buyer call the stock from us on Jan. 18, 2019, but we still got to keep the $290 in premium we received for selling the option.
Below are the details of the trade broken down step-by-step.
