• Binary option

A binary option is a financial exotic option in which the payoff is either some fixed monetary amount or nothing at all. The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The former pays some fixed amount of cash if the option expires in-the-money while the latter pays the value of the underlying security. They are also called all-or-nothing options, digital options (more common in forex/interest rate markets), and fixed return options (FROs) (on the American Stock Exchange).

https://en.wikipedia.org/wiki/Binary_option

• Binary Pricing

While binary options may be used in theoretical asset pricing, they are prone to fraud in their applications and hence banned by regulators in many jurisdictions as a form of gambling. Many binary option outlets have been exposed as fraudulent. The U.S. FBI is investigating binary option scams throughout the world, and the Israeli police have tied the industry to criminal syndicates. The European Securities and Markets Authority have banned retail binary options trading. Australian Securities and Investments Commission considers binary options as a high-risk and unpredictable investment option.

https://en.wikipedia.org/wiki/Binary_option

• What Is A Binary Option?

A binary option is a type of options contract in which the payout will depend entirely on the outcome of a yes/no proposition. The yes/no proposition typically relates to whether the price of a particular asset that underlies the binary option will rise above or fall below a specified amount.

www.sec.gov

• Binary Options Explained

Binary options are financial options that come with one of two payoff options: a fixed amount or nothing at all. That's why they're called binary options—because there is no other settlement possible. The premise behind a binary option is a simple yes or no proposition: Will an underlying asset be above a certain price at a certain time?

Traders place trades based on whether they believe the answer is yes or no, making it one of the simplest financial assets to trade. This simplicity has resulted in broad appeal among traders and newcomers to the financial markets. As simple as it may seem, traders should fully understand how binary options work, what markets and time frames they can trade with binary options, advantages, and disadvantages of these products, and which companies are legally authorized to provide binary options to U.S. residents.

Binary options traded outside the U.S. are typically structured differently than binaries available on U.S. exchanges. When considering speculating or hedging, binary options are an alternative—but only if the trader fully understands the two potential outcomes of these exotic options.

Now that you know some of the basics, read on to find out more about binary options, how they operate, and how you can trade them in the United States.

https://www.investopedia.com/./..binary-options-us.asp

• Example

Binary options provide a way to trade markets with capped risk and capped profit potential, based on a yes or no proposition.

Let's take the following question as an example: Will the price of gold be above $1,250 at 1:30 p.m. today?

If you believe it will be, you buy the binary option. If you think gold will be below $1,250 at 1:30 p.m., then you sell this binary option. The price of a binary option is always between $0 and $100, and just like other financial markets, there is a bid and ask price.

The above binary may be trading at $42.50 (bid) and $44.50 (offer) at 1 p.m. If you buy the binary option right then, you will pay $44.50. If you decide to sell right then, you'll sell at $42.50.

Let's assume you decide to buy at $44.50. If at 1:30 p.m. the price of gold is above $1,250, your option expires and it becomes worth $100. You make a profit of $100—$44.50 = $55.50 (minus fees). This is called being in the money. But if the price of gold is below $1,250 at 1:30 p.m., the option expires at $0. Therefore you lose the $44.50 invested. This called out of the money.

The bid and offer fluctuate until the option expires. You can close your position at any time before expiry to lock in a profit or a reduce a loss, compared to letting it expire out of the money.

https://www.investopedia.com/./..binary-options-us.asp

• Determination of the Bid and Ask

The bid and ask are determined by traders themselves as they assess the probability of the proposition being true or not. In simple terms, if the bid and ask on a binary option is at 85 and 89, respectively, then traders are assuming a very high probability that the outcome of the binary option will be yes, and the option will expire worth $100. If the bid and ask are near 50, traders are unsure if the binary will expire at $0 or $100—it's even odds.

If the bid and ask are at 10 and 15, respectively, that indicates traders think there is a high likelihood the option outcome will be no, and expire worth $0. The buyers in this area are willing to take the small risk for a big gain. While those selling are willing to take a small—but very likely—profit for a large risk (relative to their gain).

https://www.investopedia.com/./..binary-options-us.asp

• Where to Trade Binary Options

Binary options trade on the Nadex exchange, the first legal U.S. exchange focused on binary options. Nadex, or the North American Derivatives Exchange, provides its own browser-based binary options trading platform which traders can access via demo account or live account. The trading platform provides real-time charts along with direct market access to current binary option prices.

Binary options trade on the Nadex—the North American Derivatives Exchange.

Binary options are also available through the Chicago Board Options Exchange. Anyone with an options-approved brokerage account can trade CBOE binary options through their traditional trading account. Not all brokers provide binary options trading, however.

https://www.investopedia.com/./..binary-options-us.asp

• Fees for Binary Options

Each Nadex contract traded costs $0.90 to enter and $0.90 to exit. The fee is capped at $9, so purchasing 15 lots will still only cost $9 to enter and $9 to exit.

If you hold your trade until settlement and finish in the money, the fee to exit is assessed to you at expiry. But if you hold the trade until settlement, but finish out of the money, no trade fee to exit is assessed.

CBOE binary options are traded through various option brokers. Each charges their own commission fee.

https://www.investopedia.com/./..binary-options-us.asp

• Pick Your Binary Market

Multiple asset classes are tradable via binary option. Nadex offers trading in major indices such as the Dow 30 (Wall Street 30), the S&P 500 (US 500), Nasdaq 100 (US TECH 100), and Russell 2000 (US Smallcap 2000). Global indices for the United Kingdom (FTSE 100), Germany (Germany 30), and Japan (Japan 225) are also available.

Trades can be placed on forex pairs: EUR/USD, GBP/USD, USD/JPY, EUR/JPY, AUD/USD, USD/CAD, GBP/JPY, USD/CHF, EUR/GBP, as well as AUD/JPY.

Nadex offers commodity binary options related to the price of crude oil, natural gas, gold, silver, copper, corn, and soybeans.

Trading news events are also possible with event binary options. Buy or sell options based on whether the Federal Reserve will increase or decrease rates, or whether jobless claims and nonfarm payrolls will come in above or below consensus estimates.

The CBOE offers two binary options for trade. An S&P 500 Index option (BSZ) based on the S&P 500 Index, and a Volatility Index option (BVZ) based on the CBOE Volatility Index (VIX).

https://www.investopedia.com/./..binary-options-us.asp

• Pick Your Option Time Frame

A trader may choose from Nadex binary options (in the above asset classes) that expire hourly, daily, or weekly.

Hourly options provide an opportunity for day traders, even in quiet market conditions, to attain an established return if they are correct in choosing the direction of the market over that time frame.

Daily options expire at the end of the trading day and are useful for day traders or those looking to hedge other stock, forex, or commodity holdings against that day's movements.

Weekly options expire at the end of the trading week and are thus traded by swing traders throughout the week, and also by day traders as the options' expiry approaches on Friday afternoon.

Event-based contracts expire after the official news release associated with the event, and so all types of traders take positions well in advance of and right up to the expiry.

https://www.investopedia.com/./..binary-options-us.asp

• Pros and Cons of Binary Options

Unlike the actual stock or forex markets where price gaps or slippage can occur, the risk of binary options is capped. It's not possible to lose more than the cost of the trade.

Better-than-average returns are also possible in very quiet markets. If a stock index or forex pair is barely moving, it's hard to profit, but with a binary option, the payout is known. If you buy a binary option at $20, it will either settle at $100 or $0, making you $80 on your $20 investment or losing you $20. This is a 4:1 reward to risk ratio, an opportunity which is unlikely to be found in the actual market underlying the binary option.

The flip side of this is that your gain is always capped. No matter how much the stock or forex pair moves in your favor, the most a binary option can be worth is $100. Purchasing multiple options contracts is one way to potentially profit more from an expected price move.

Since binary options are worth a maximum of $100, that makes them accessible to traders even with limited trading capital, as traditional stock day trading limits do not apply. Trading can begin with a $100 deposit at Nadex.

Binary options are a derivative based on an underlying asset, which you do not own. You're thus not entitled to voting rights or dividends that you'd be eligible to receive if you owned an actual stock.

https://www.investopedia.com/./..binary-options-us.asp

• The Bottom Line

Binary options are based on a yes or no proposition. Your profit and loss potential are determined by your buy or sale price, and whether the option expires worth $100 or $0. Risk and reward are both capped, and you can exit options at any time before expiry to lock in a profit or reduce a loss.

Binary options within the U.S are traded via the Nadex and CBOE exchanges. Foreign companies soliciting U.S. residents to trade their form of binary options are usually operating illegally. Binary options trading has a low barrier to entry, but just because something is simple doesn't mean it'll be easy to make money with. There is always someone else on the other side of the trade who thinks they're correct and you're wrong.

https://www.investopedia.com/./..binary-options-us.asp

• Call Option

A call option, often simply labeled a "call", is a contract, between the buyer and the seller of the call option, to exchange a security at a set price.[1] The buyer of the call option has the right, but not the obligation, to buy an agreed quantity of a particular commodity or financial instrument (the underlying) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). The seller (or "writer") is obliged to sell the commodity or financial instrument to the buyer if the buyer so decides. The buyer pays a fee (called a premium) for this right. The term "call" comes from the fact that the owner has the right to "call the stock away" from the seller.

https://en.wikipedia.org/wiki/Call_option

• What Is a Call Option?

Call options are financial contracts that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity, or other asset or instrument at a specified price within a specific time period. The stock, bond, or commodity is called the underlying asset. A call buyer profits when the underlying asset increases in price.

A call option may be contrasted with a put option, which gives the holder the right to sell the underlying asset at a specified price on or before expiration.

https://www.investopedia.com/terms/c/calloption.asp

• Understanding Call Options

Let's assume the underlying asset is stock. Call options give the holder the right to buy 100 shares of a company at a specific price, known as the strike price, up until a specified date, known as the expiration date.

For example, a single call option contract may give a holder the right to buy 100 shares of Apple stock at $100 up until the expiry date in three months. There are many expiration dates and strike prices for traders to choose from. As the value of Apple stock goes up, the price of the option contract goes up, and vice versa. The call option buyer may hold the contract until the expiration date, at which point they can take delivery of the 100 shares of stock or sell the options contract at any point before the expiration date at the market price of the contract at that time.

You pay a fee to purchase a call option, called the premium. It is the price paid for the rights that the call option provides. If at expiry the underlying asset is below the strike price, the call buyer loses the premium paid. This is the maximum loss.

If the underlying asset's current market price is above the strike price at expiry, the profit is the difference in prices, minus the premium. This sum is then multiplied by how many shares the option buyer controls.

For example, if Apple is trading at $110 at expiry, the option contract strike price is $100, and the options cost the buyer $2 per share, the profit is $110 - ($100 +$2) = $8. If the buyer bought one options contract, their profit equates to $800 ($8 x 100 shares); $1,600 if they bought two contracts ($8 x 200).

Now, if at expiry Apple is trading below $100, obviously the buyer won't exercise the option to buy the shares at $100 per, and it expires worthless. The buyer loses $2 per share, or $200, for each contract they bought—but that's all. That's the beauty of options: You're only out the premium if you decide not to play.

https://www.investopedia.com/terms/c/calloption.asp

• Using Options for Income

Some investors use call options to generate income through a covered call strategy. This strategy involves owning an underlying stock while at the same time writing a call option, or giving someone else the right to buy your stock. The investor collects the option premium and hopes the option expires worthless (below strike price). This strategy generates additional income for the investor but can also limit profit potential if the underlying stock price rises sharply.

Covered calls work because if the stock rises above the strike price, the option buyer will exercise their right to buy the stock at the lower strike price. This means the option writer doesn't profit on the stock's movement above the strike price. The options writer's maximum profit on the option is the premium received.

https://www.investopedia.com/terms/c/calloption.asp

• Using Options for Speculation

Options contracts give buyers the opportunity to obtain significant exposure to a stock for a relatively small price. Used in isolation, they can provide significant gains if a stock rises. But they can also result in a 100% loss of the premium if the call option expires worthless due to the underlying stock price failing to move above the strike price. The benefit of buying call options is that risk is always capped at the premium paid for the option.

Investors may also buy and sell different call options simultaneously, creating a call spread. These will cap both the potential profit and loss from the strategy but are more cost-effective in some cases than a single call option, since the premium collected from one option's sale offsets the premium paid for the other.

https://www.investopedia.com/terms/c/calloption.asp

• Using Options for Tax Management

Investors sometimes use options to change portfolio allocations without actually buying or selling the underlying security.

For example, an investor may own 100 shares of XYZ stock and may be liable for a large unrealized capital gain. Not wanting to trigger a taxable event, shareholders may use options to reduce the exposure to the underlying security without actually selling it. While gains from call and put options are also taxable, their treatment by the IRS is more complex because of the multiple types and varieties of options. In the case above, the only cost to the shareholder for engaging in this strategy is the cost of the options contract itself.

https://www.investopedia.com/terms/c/calloption.asp

• How Do Call Options Work?

Call options are a type of derivative contract that gives the holder the right, but not the obligation, to purchase a specified number of shares at a predetermined price, known as the “strike price” of the option. If the market price of the stock rises above the option’s strike price, the option holder can exercise their option, buying at the strike price and selling at the higher market price in order to lock in a profit.

Options only last for a limited period of time, however. If the market price does not rise above the strike price during that period, the options expire worthless.

https://www.investopedia.com/terms/c/calloption.asp

• Why Would You Buy a Call Option?

Investors will consider buying call options if they are optimistic—or “bullish”—about the prospects of its underlying shares. For these investors, call options might provide a more attractive way to speculate on the prospects of a company because of the leverage that they provide. After all, each options contract provides the opportunity to buy 100 shares of the company in question. For an investor who is confident that a company’s shares will rise, buying shares indirectly through call options can be an attractive way to increase their purchasing power.

https://www.investopedia.com/terms/c/calloption.asp

• Is Buying a Call Bullish or Bearish?

Buying calls is a bullish behavior because the buyer only profits if the price of the shares rises. Conversely, selling call options is a bearish behavior, because the seller profits if the shares do not rise. Whereas the profits of a call buyer are theoretically unlimited, the profits of a call seller are limited to the premium they receive when they sell the calls.

https://www.investopedia.com/terms/c/calloption.asp

• What are call options?

A call option is a contract between a buyer and a seller to purchase a certain stock at a certain price up until a defined expiration date. The buyer of a call has the right, not the obligation, to exercise the call and purchase the stocks. On the other hand, the seller of the call has the obligation and not the right to deliver the stock if assigned by the buyer.

For instance, 1 ABC 110 call option gives the owner the right to buy 100 ABC Inc. shares for $110 each (that's the strike price), regardless of the market price of ABC shares, until the option's expiration date.

Suppose ABC shares are trading at $100 today—the owner of the ABC 110 call option hopes shares rise above $110—any appreciation above that represents the potential payout. If you exercise the call when shares trade at $120, then you buy 100 ABC shares for $110 and voilà: your return is $10 per share for a total gain of $1,000.

But all that fun isn't free. A call buyer must pay the seller a premium: for example, a price of $3 per share. Since the ABC 110 call option then costs $300 and paid out $1,000, the net return is $700.

These examples do not include any commissions or fees that may be incurred, as well as tax implications.

https://www.fidelity.com/../call-options-basics

• Futures

A futures contract is the obligation to sell or buy an asset at a later date at an agreed-upon price. Futures contracts are a true hedge investment and are most understandable when considered in terms of commodities like corn or oil. For instance, a farmer may want to lock in an acceptable price upfront in case market prices fall before the crop can be delivered. The buyer also wants to lock in a price upfront, too, if prices soar by the time the crop is delivered.

https://www.investopedia.com/../futures/

• Examples

Let's demonstrate with an example. Assume two traders agree to a $50 per bushel price on a corn futures contract. If the price of corn moves up to $55, the buyer of the contract makes $5 per barrel. The seller, on the other hand, loses out on a better deal.

The market for futures has expanded greatly beyond oil and corn. Stock futures can be purchased on individual stocks or on an index like the S&P 500. The buyer of a futures contract is not required to pay the full amount of the contract upfront. A percentage of the price called an initial margin is paid.

For example, an oil futures contract is for 1,000 barrels of oil. An agreement to buy an oil futures contract at $100 represents the equivalent of a $100,000 agreement. The buyer may be required to pay several thousand dollars for the contract and may owe more if that bet on the direction of the market proves to be wrong.

https://www.investopedia.com/../futures/

• Who Trades Futures?

Futures were invented for institutional buyers. These dealers intend to actually take possession of crude oil barrels to sell to refiners or tons of corn to sell to supermarket distributors. Establishing a price in advance makes the businesses on both sides of the contract less vulnerable to big price swings.

Retail buyers, however, buy and sell futures contracts as a bet on the price direction of the underlying security. They want to profit from changes in the price of futures, up or down. They do not intend to actually take possession of any products.

https://www.investopedia.com/../futures/

• Futures Risk

Options may be risky, but futures are riskier for the individual investor. Futures contracts involve maximum liability to both the buyer and the seller. As the underlying stock price moves, either party to the agreement may have to deposit more money into their trading accounts to fulfill a daily obligation. This is because gains on futures positions are automatically marked to market daily, meaning the change in the value of the positions, up or down, is transferred to the futures accounts of the parties at the end of every trading day.

https://www.investopedia.com/../futures/

• What Are Futures?

Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. The buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.

Underlying assets include physical commodities or other financial instruments. Futures contracts detail the quantity of the underlying asset and are standardized to facilitate trading on a futures exchange. Futures can be used for hedging or trade speculation.

https://www.investopedia.com/terms/f/futures.asp

• Using Futures

The futures markets typically use high leverage. Leverage means that the trader does not need to put up 100% of the contract's value amount when entering into a trade. Instead, the broker would require an initial margin amount, which consists of a fraction of the total contract value.

The amount held by the broker in a margin account can vary depending on the size of the contract, the creditworthiness of the investor, and the broker's terms and conditions.

The exchange where the futures contract trades will determine if the contract is for physical delivery or if it can be cash-settled. A corporation may enter into a physical delivery contract to lock in—hedge—the price of a commodity they need for production. However, most futures contracts are from traders who speculate on the trade. These contracts are closed out or netted—the difference in the original trade and closing trade price—and are a cash settlement.

https://www.investopedia.com/terms/f/futures.asp

• Futures for Speculation

A futures contract allows a trader to speculate on the direction of movement of a commodity's price. If a trader bought a futures contract and the price of the commodity rose and was trading above the original contract price at expiration, then they would have a profit. Before expiration, the buy trade—the long position—would be offset or unwound with a sell trade for the same amount at the current price, effectively closing the long position.

The difference between the prices of the two contracts would be cash-settled in the investor's brokerage account, and no physical product will change hands. However, the trader could also lose if the commodity's price was lower than the purchase price specified in the futures contract.

Speculators can also take a short or sell speculative position if they predict the price of the underlying asset will fall. If the price does decline, the trader will take an offsetting position to close the contract. Again, the net difference would be settled at the expiration of the contract. An investor would realize a gain if the underlying asset's price was below the contract price and a loss if the current price was above the contract price.

https://www.investopedia.com/terms/f/futures.asp

• What Are Futures Contracts?

Futures contracts are an investment vehicle that allows the buyer to bet on the future price of a commodity or other security. There are many types of futures contracts available, on assets such as oil, stock market indices, currencies, and agricultural products.

Unlike forward contracts, which are customized between the parties involved, futures contracts trade on organized exchanges such as those operated by the CME Group Inc. (CME). Futures contracts are popular among traders, who aim to profit on price swings, as well as commercial customers who wish to hedge their risks.

https://www.investopedia.com/terms/f/futures.asp

Are Futures a Type of Derivative?

Yes, futures contracts are a type of derivative product. They are derivatives because their value is based on the value of an underlying asset, such as oil in the case of crude oil futures. Like many derivatives, futures are a leveraged financial instrument, offering the potential for outsize gains or losses. As such, they are generally considered to be an advanced trading instrument and are mostly traded only by experienced investors and institutions.

https://www.investopedia.com/terms/f/futures.asp

• Expiration

Oftentimes, traders who hold futures contracts until expiration will settle their position in cash. In other words, the trader will simply pay or receive a cash settlement depending on whether the underlying asset increased or decreased during the investment holding period.

In some cases, however, futures contracts will require physical delivery. In this scenario, the investor holding the contract upon expiration would be responsible for storing the goods and would need to cover costs for material handling, physical storage, and insurance.

https://www.investopedia.com/terms/f/futures.asp

• What Are Greeks?

"Greeks" is a term used in the options market to describe the different dimensions of risk involved in taking an options position. These variables are called Greeks because they are typically associated with Greek symbols. Each "Greek" variable is a result of an imperfect assumption or relationship of the option with another underlying variable. Traders use different Greek values, such as delta, theta, and others, to assess options risk and manage option portfolios.

https://www.investopedia.com/terms/g/greeks.asp

• Understanding Greeks

Greeks encompass many variables. These include delta, theta, gamma, vega, and rho, among others. Each one of these variables/Greeks has a number associated with it, and that number tells traders something about how the option moves or the risk associated with that option. The primary Greeks (Delta, Vega, Theta, Gamma, and Rho) are calculated each as a first partial derivative of the options pricing model (for instance, the Black-Scholes model).

The number or value associated with a Greek changes over time. Therefore, sophisticated options traders may calculate these values daily to assess any changes which may affect their positions or outlook, or to check if their portfolio needs to be rebalanced. Below are several of the main Greeks traders look at.

https://www.investopedia.com/terms/g/greeks.asp

• Delta

Delta (Δ) represents the rate of change between the option's price and a $1 change in the underlying asset's price. In other words, the price sensitivity of the option is relative to the underlying asset. Delta of a call option has a range between zero and one, while the delta of a put option has a range between zero and negative one. For example, assume an investor is long a call option with a delta of 0.50. Therefore, if the underlying stock increases by $1, the option's price would theoretically increase by 50 cents.

For options traders, delta also represents the hedge ratio for creating a delta-neutral position. For example if you purchase a standard American call option with a 0.40 delta, you will need to sell 40 shares of stock to be fully hedged. Net delta for a portfolio of options can also be used to obtain the portfolio's hedge ration.

A less common usage of an option's delta is it's current probability that it will expire in-the-money. For instance, a 0.40 delta call option today has an implied 40% probability of finishing in-the-money. (For more on the delta, see our article: Going Beyond Simple Delta: Understanding Position Delta.)

https://www.investopedia.com/terms/g/greeks.asp

• Theta

Theta (Θ) represents the rate of change between the option price and time, or time sensitivity - sometimes known as an option's time decay. Theta indicates the amount an option's price would decrease as the time to expiration decreases, all else equal. For example, assume an investor is long an option with a theta of -0.50. The option's price would decrease by 50 cents every day that passes, all else being equal.

Theta increases when options are at-the-money, and decreases when options are in- and out-of-the money. Options closer to expiration also have accelerating time decay. Long calls and long puts will usually have negative Theta; short calls and short puts will have positive Theta. By comparison, an instrument whose value is not eroded by time, such as a stock, would have zero Theta.

https://www.investopedia.com/terms/g/greeks.asp

• Gamma

Gamma (Γ) represents the rate of change between an option's delta and the underlying asset's price. This is called second-order (second-derivative) price sensitivity. Gamma indicates the amount the delta would change given a $1 move in the underlying security. For example, assume an investor is long one call option on hypothetical stock XYZ. The call option has a delta of 0.50 and a gamma of 0.10. Therefore, if stock XYZ increases or decreases by $1, the call option's delta would increase or decrease by 0.10.

Gamma is used to determine how stable an option's delta is: higher gamma values indicate that delta could change dramatically in response to even small movements in the underlying's price. Gamma is higher for options that are at-the-money and lower for options that are in- and out-of-the-money, and accelerates in magnitude as expiration approaches. Gamma values are generally smaller the further away from the date of expiration; options with longer expirations are less sensitive to delta changes. As expiration approaches, gamma values are typically larger, as price changes have more impact on gamma.

Options traders may opt to not only hedge delta but also gamma in order to be delta-gamma neutral, meaning that as the underlying price moves, the delta will remain close to zero.

https://www.investopedia.com/terms/g/greeks.asp

• Vega

Vega (v) represents the rate of change between an option's value and the underlying asset's implied volatility. This is the option's sensitivity to volatility. Vega indicates the amount an option's price changes given a 1% change in implied volatility. For example, an option with a Vega of 0.10 indicates the option's value is expected to change by 10 cents if the implied volatility changes by 1%.

Because increased volatility implies that the underlying instrument is more likely to experience extreme values, a rise in volatility will correspondingly increase the value of an option. Conversely, a decrease in volatility will negatively affect the value of the option. Vega is at its maximum for at-the-money options that have longer times until expiration.

https://www.investopedia.com/terms/g/greeks.asp

• Rho

Rho (p) represents the rate of change between an option's value and a 1% change in the interest rate. This measures sensitivity to the interest rate. For example, assume a call option has a rho of 0.05 and a price of $1.25. If interest rates rise by 1%, the value of the call option would increase to $1.30, all else being equal. The opposite is true for put options. Rho is greatest for at-the-money options with long times until expiration.

https://www.investopedia.com/terms/g/greeks.asp

• Minor Greeks

Some other Greeks, with aren't discussed as often, are lambda, epsilon, vomma, vera, speed, zomma, color, ultima. These Greeks are second- or third-derivatives of the pricing model and affect things such as the change in delta with a change in volatility and so on. They are increasingly used in options trading strategies as computer software can quickly compute and account for these complex and sometimes esoteric risk factors.

https://www.investopedia.com/terms/g/greeks.asp

• LEAPS (finance)

In finance, Long-term Equity Anticipation Securities (LEAPS) are derivatives that track the price of an underlying financial instrument (stocks or indices). They are option contracts with a much longer time to expiry than standard options. According to the Options Industry Council, the educational arm of the Options Clearing Corporation, LEAPS are available on stocks and indexes that have an average daily trading volume of at least 1000 contracts. As with standard options, LEAPS are available in two forms, calls and puts.

Options were originally created with expiry cycles of 3, 6, and 9 months, with no option term lasting more than a year. Options of this form, for such terms, still constitute the vast majority of options activity. LEAPS were created relatively recently and typically extend for terms of 2 years out. Equity LEAPS typically expire in January. For example, if today were December 2020, one could buy a Microsoft option that would expire in January of 2021, 2022, or 2023. The latter two are LEAPS. In practice, LEAPS behave and are traded just like standard options.

When LEAPS were first introduced in 1990, they were derivative instruments solely for stocks; however, more recently, equivalent instruments for indices have become available. These are also referred to as LEAPS.

https://en.wikipedia.org/wiki/LEAPS_(finance)

• What Are LEAPS

Long-term equity anticipation securities (LEAPS) are publicly traded options contracts with expiration dates that are longer than one year, and typically up to three years from issue. They are functionally identical to most other listed options, except with longer times until expiration. They were first introduced by the Chicago Board Options Exchange (CBOE) in 1990, and are now ubiquitous.

As with all options contracts, a LEAPS contract grants a buyer the right, but not the obligation, to purchase or sell (depending on if the option is a call or a put, respectively) the underlying asset at the predetermined price on or before its expiration date.

https://www.investopedia.com/terms/l/leaps.asp

• Understanding LEAPS

LEAPS are no different from short-term options, except for the later expiration dates. Lengthier times until maturity allow long-term investors to gain exposure to prolonged price movements.

As with many short-term options contracts, investors pay a premium—upfront fee—for the ability to buy or sell above or below the option's strike price. The strike is the decided upon price for the underlying asset at which it converts at expiry. For example, a $25 strike price for a GE call option would mean an investor could buy 100 shares of GE at $25 at expiry. The investor will exercise the $25 option if the market price is higher than the strike price. Should it be less, the investor will allow the option to expire and will lose the price paid for the premium. Also, remember each options contract—put or call—equates to 100 shares of the underlying asset.

An investor must understand that they will be tying funds up in these long-term contracts. Changes in the market interest rate and market or asset volatility may make these options more or less valuable, depending on the holding and the direction of movement.

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• Premiums

Premiums are the non-refundable cost associated with an options contract. The premiums for LEAPS are higher than those for standard options in the same stock because the further out expiration date gives the underlying asset more time to make a substantial move and for the investor to make a healthy profit. Known as the time value, option marketplaces use this lengthy timeframe and the intrinsic value of the contract to determine the value of the option.

Intrinsic value is the calculated or estimated value of how likely the option is to make a profit based on the difference between the asset's market and strike price. This value may include profit that already exists in the contract before purchase. The contract writer will use fundamental analysis of the underlying asset or business to help place the intrinsic value.

As mentioned earlier, the option contract has a basis of 100 shares of the asset. So, if the premium for Facebook (FB) is $6.25, the option buyer will pay $625 total premium ($6.25 x 100 = $625).

Other factors that can affect the premium price include the volatility of the stock, the market interest rate, and if the asset returns dividends. Finally, throughout the life of the contract, the option will have a theoretical value derived from the use of various pricing models. This fluctuating price indicates what the holder may receive if they sell their contract to another investor before expiration.

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• Long-Term vs Short-Term

LEAPS also allow investors to gain access to the long-term options market without needing to use a combination of shorter-term option contracts. Short-term options have a maximum expiration date of one year. Without LEAPS, investors who wanted a two-year option would have to buy a one-year option, let it expire, and simultaneously purchase a new one-year options contract.

This process—called rolling contracts over—would expose the investor to market changes in the prices of the underlying asset as well as additional option premiums. LEAPS provide the longer-term trader with exposure to a prolonged trend in a particular security with one trade.

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• LEAP Calls

Equity—another name for stocks—LEAPS call options allow investors to benefit from potential rises in a specific stock while using less capital than purchasing shares with cash upfront. In other words, the cost of the premium for an option is lower than the cash needed to buy 100 shares outright. Similar to short-term call options, LEAPS calls allow investors to exercise their options by purchasing the shares of the underlying stock at the strike price.

Another advantage of LEAPS calls is that they let the holder sell the contract at any time before the expiration. The difference in premiums between the purchase and sale prices can lead to a profit or loss. Also, investors must include any fees or commissions charged by their broker to buy or sell the contract.

https://www.investopedia.com/terms/l/leaps.asp

• LEAP Puts

LEAPS puts provide investors with a long-term hedge if they own the underlying stock. Put options gain in value as an underlying stock's price declines, potentially offsetting the losses incurred for owning shares of the stock. In essence, the put can help cushion the blow of falling asset prices.

For example, an investor who owns shares of XYZ Inc. and wishes to hold them for the long term might be fearful that the stock price could fall. To allay these concerns, the investor could purchase LEAPS puts on XYZ to hedge against unfavorable moves in the long stock position. LEAPS puts help investors benefit from price declines without the need to short sell shares of the underlying stock.

Short selling involves borrowing shares from a broker and selling them with the expectation that the stock will continue to depreciate by expiry. At expiry, the shares are purchased—hopefully at a lower price—and the position is netted out for a gain or loss. However, short selling can be extremely risky if the stock price rises instead of falling, leading to significant losses.

https://www.investopedia.com/terms/l/leaps.asp

• Index LEAPS

A market index is a theoretical portfolio made up of several underlying assets that represent a market segment, industry, or other groups of securities. There are LEAPS available for equity indexes. Similar to the single equity LEAPS, index LEAPS allow investors to hedge and invest in indices such as the Standard & Poor's 500 Index (S&P 500).

Index LEAPS give the holder the ability to track the entire stock market or specific industry sectors and take a bullish stance using call options or a bearish stance using put options. Investors could also hedge their portfolios against adverse market moves with index LEAPS puts.

https://www.investopedia.com/terms/l/leaps.asp

• Rolling LEAP Options

Options are usually seen as tools for the "fast money" crowd. If an option trader can correctly forecast a stock's price within a specific time frame and buy the appropriate option, huge profits can be made in a few months. However, if the prediction is wrong, then the same option could easily expire worthless, wiping out the original investment.

However, options can also be useful for buy-and-hold investors. Since 1990, investors have been able to buy options with expiration dates ranging from nine months to three years into the future. These options are known as LEAP (Long-Term Equity Anticipation Securities) options.

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• Buying LEAPS

Investors can purchase a LEAP call option contracts instead of shares of stock in order to get similar long-term investment benefits with less capital outlay. Substituting a financial derivative for a stock is known as a Stock Replacement strategy, and is used to improve overall capital efficiency.

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• Rolled LEAPS

The biggest problem with options for the buy and hold investor is the short-term nature of the security. And even LEAP options with expirations over a year may be too short for the most ardent buy and hold investor.

However, a LEAP option can be replaced by another LEAP with a later expiry. For example, a two-year LEAP call could be held for a single year and then sold and replaced by another two-year option. This could be done for many years, regardless of whether the price of the underlying security goes up or down. Making options a viable choice for buy and hold investors.

Selling older LEAP calls and purchasing new ones in this manner is called the Option Roll Forward, or sometimes just the Roll. An investor makes regular small cash outlays in order to maintain a large leveraged investment position for long periods.

Rolling an option forward is inexpensive, because the investor is selling a similar option with similar characteristics at the same time. However, predicting the exact cost is impossible because option pricing depends upon factors such as volatility, interest rates and dividend yield that can never be precisely forecasted. Using the spread between a two-year and one-year option of the underlying security at the same strike price, is a reasonable proxy.

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• Leverage Ratio and Volatility

At the money LEAP call options initially have higher leverage and volatility. Minor changes in the market price of the underlying security can result in high percentage changes in the price of the option, and the value may fluctuate by 5% on a typical day. The investor should be prepared for this volatility.

Over periods of years, as the underlying security appreciates and the call option builds equity, the option loses most of its leverage and becomes much less volatile. Given multi-year holding periods, the results of the investment are relatively predictable using statistics and averages.

Note that a $1 increase in the underlying security will not immediately result in a full $1 increase in the LEAP call price. Because options have delta, they receive some appreciation immediately, and then accumulate the remainder as they get closer to expiry. This also makes them more suited for investors with longer holding periods.

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• Options (finance)

In finance, an option is a contract which conveys its owner, the holder, the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price prior to or on a specified date, depending on the form of the option. Options are typically acquired by purchase, as a form of compensation, or as part of a complex financial transaction. Thus, they are also a form of asset and have a valuation that may depend on a complex relationship between underlying asset value, time until expiration, market volatility, and other factors. Options may be traded between private parties in over-the-counter (OTC) transactions, or they may be exchange-traded in live, orderly markets in the form of standardized contracts.

https://en.wikipedia.org/wiki/Option_(finance)

• What Are Options?

Options are contracts that give the bearer the right—but not the obligation—to either buy or sell an amount of some underlying asset at a predetermined price at or before the contract expires. Like most other asset classes, options can be purchased with brokerage investment accounts.

Options are powerful because they can enhance an individual’s portfolio. They do this through added income, protection, and even leverage. Depending on the situation, there is usually an option scenario appropriate for an investor’s goal. A popular example would be using options as an effective hedge against a declining stock market to limit downside losses. Options can also generate recurring income. Additionally, they are often used for speculative purposes, such as wagering on the direction of a stock.

https://www.investopedia.com/options-basics-tutorial-4583012

• Options as Derivatives

Options belong to the larger group of securities known as derivatives. A derivative's price is dependent on or derived from the price of something else. Options are derivatives of financial securities—their value depends on the price of some other asset. Examples of derivatives include calls, puts, futures, forwards, swaps, and mortgage-backed securities, among others.

https://www.investopedia.com/options-basics-tutorial-4583012

• Speculation

Speculation is a wager on future price direction. A speculator might think the price of a stock will go up, perhaps based on fundamental analysis or technical analysis. A speculator might buy the stock or buy a call option on the stock. Speculating with a call option—instead of buying the stock outright—is attractive to some traders because options provide leverage. An out-of-the-money call option may only cost a few dollars or even cents compared to the full price of a $100 stock.

https://www.investopedia.com/options-basics-tutorial-4583012

• Hedging

Options were really invented for hedging purposes. Hedging with options is meant to reduce risk at a reasonable cost. Here, we can think of using options like an insurance policy. Just as you insure your house or car, options can be used to insure your investments against a downturn.

Imagine that you want to buy technology stocks. But you also want to limit losses. By using put options, you could limit your downside risk and enjoy all the upside in a cost-effective way. For short sellers, call options can be used to limit losses if the underlying price moves against their trade—especially during a short squeeze.

https://www.investopedia.com/options-basics-tutorial-4583012

• How Options Work

In terms of valuing option contracts, it is essentially all about determining the probabilities of future price events. The more likely something is to occur, the more expensive an option that profits from that event would be. For instance, a call value goes up as the stock (underlying) goes up. This is the key to understanding the relative value of options.

The less time there is until expiry, the less value an option will have. This is because the chances of a price move in the underlying stock diminish as we draw closer to expiry. This is why an option is a wasting asset. If you buy a one-month option that is out of the money, and the stock doesn’t move, the option becomes less valuable with each passing day. Because time is a component of the price of an option, a one-month option is going to be less valuable than a three-month option. This is because with more time available, the probability of a price move in your favor increases, and vice versa.

Accordingly, the same option strike that expires in a year will cost more than the same strike for one month. This wasting feature of options is a result of time decay. The same option will be worth less tomorrow than it is today if the price of the stock doesn’t move.

Volatility also increases the price of an option. This is because uncertainty pushes the odds of an outcome higher. If the volatility of the underlying asset increases, larger price swings increase the possibilities of substantial moves both up and down. Greater price swings will increase the chances of an event occurring. Therefore, the greater the volatility, the greater the price of the option. Options trading and volatility are intrinsically linked to each other in this way.

On most U.S. exchanges, a stock option contract is the option to buy or sell 100 shares; that's why you must multiply the contract premium by 100 to get the total amount you’ll have to spend to buy the call.

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• Options Risks

Because options prices can be modeled mathematically with a model such as the Black-Scholes model, many of the risks associated with options can also be modeled and understood. This particular feature of options actually makes them arguably less risky than other asset classes, or at least allows the risks associated with options to be understood and evaluated.

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• Put Option

In finance, a put or put option is a financial market derivative instrument which gives the holder (i.e. the purchaser of the put option) the right to sell an asset (the underlying), at a specified price (the strike), by (or at) a specified date (the expiry or maturity) to the writer (i.e. seller) of the put. The purchase of a put option is interpreted as a negative sentiment about the future value of the underlying stock. The term "put" comes from the fact that the owner has the right to "put up for sale" the stock or index.

Put options are most commonly used in the stock market to protect against a fall in the price of a stock below a specified price. If the price of the stock declines below the strike price, the holder of the put has the right, but not the obligation, to sell the asset at the strike price, while the seller of the put has the obligation to purchase the asset at the strike price if the owner uses the right to do so the holder is said to exercise the option. In this way the buyer of the put will receive at least the strike price specified, even if the asset is currently worthless.

If the strike is K, and at time t the value of the underlying is S(t), then in an American option the buyer can exercise the put for a payout of K-S(t) any time until the option's maturity date T. The put yields a positive return only if the underlying price falls below the strike when the option is exercised. A European option can only be exercised at time T rather than at any time until T, and a Bermudan option can be exercised only on specific dates listed in the terms of the contract. If the option is not exercised by maturity, it expires worthless. The buyer will not usually exercise the option at an allowable date if the price of the underlying is greater than K.

https://en.wikipedia.org/wiki/Put_option

• Put Option Example

Now, think of a put option as an insurance policy. If you own your home, you are likely familiar with the process of purchasing homeowner’s insurance. A homeowner buys a homeowner’s policy to protect their home from damage. They pay an amount called a premium for a certain amount of time, let’s say a year. The policy has a face value and gives the insurance holder protection in the event the home is damaged.

What if, instead of a home, your asset was a stock or index investment? Similarly, if an investor wants insurance on their S&P 500 index portfolio, they can purchase put options. An investor may fear that a bear market is near and may be unwilling to lose more than 10% of their long position in the S&P 500 index. If the S&P 500 is currently trading at $2,500, they can purchase a put option giving them the right to sell the index at $2,250, for example, at any point in the next two years.

If in six months the market crashes by 20% (500 points on the index), they have made 250 points by being able to sell the index at $2,250 when it is trading at $2,000—a combined loss of just 10%. In fact, even if the market drops to zero, the loss would only be 10% if this put option is held. Again, purchasing the option will carry a cost (the premium), and if the market doesn’t drop during that period, the maximum loss on the option is just the premium spent.

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• The Basics of Put Options

Puts are traded on various underlying assets, which can include stocks, currencies, commodities, and indexes. The buyer of a put option may sell, or exercise, the underlying asset at a specified strike price.

Put options are traded on various underlying assets, including stocks, currencies, bonds, commodities, futures, and indexes. They are key to understanding when choosing whether to perform a straddle or a strangle.

The value of a put option appreciates as the price of the underlying stock depreciates relative to the strike price. On the flip side, the value of a put option decreases as the underlying stock increases. A put option's value also decreases as its expiration date approaches. Conversely, a put option loses its value as the underlying stock increases.

Because put options, when exercised, provide a short position in the underlying asset, they are used for hedging purposes or to speculate on downside price action. Investors often use put options in a risk-management strategy known as a protective put. This strategy is used as a form of investment insurance to ensure that losses in the underlying asset do not exceed a certain amount, namely the strike price.

In general, the value of a put option decreases as its time to expiration approaches due to time decay because the probability of the stock falling below the specified strike price decreases. When an option loses its time value, the intrinsic value is left over, which is equivalent to the difference between the strike price less the underlying stock price. If an option has intrinsic value, it is in the money (ITM).

https://www.investopedia.com/terms/p/put.asp

• Put Option Example

An investor purchases one put option contract on ABC company for $100. Each option contract covers 100 shares. The exercise price of the shares is $10, and the current ABC share price is $12. This put option contract has given the investor the right, but not the obligation, to sell 100 shares of ABC at $10.

If ABC shares drop to $8, the investor's put option is in the money (ITM)—which means that the strike price is below the market price of the underlying asset—and she can close her option position by selling the contract on the open market.

On the other hand, she can purchase 100 shares of ABC at the existing market price of $8, and then exercise her contract to sell the shares for $10. Disregarding commissions, the profit for this position is $200, or 100 x ($10 - $8). Remember that the investor paid a $100 premium for the put option, giving her the right to sell her shares at the exercise price. Factoring in this initial cost, her total profit is $200 - $100 = $100.

As another way of working a put option as a hedge, if the investor in the previous example already owns 100 shares of ABC company, that position would be called a married put and could serve as a hedge against a decline in the share price.

https://www.investopedia.com/terms/p/put.asp

• Long Put

A long put is similar to a long call except that the trader will buy puts, betting that the underlying stock’s price will decrease. Suppose a trader purchases a contract with 100 put options for a stock trading at $20. Each option is priced at $2. Therefore, the total investment in the contract is $200. The trader will recoup her costs when the stock’s price falls to $8. Thereafter, the stock’s losses mean profits for the trader. But these profits are capped because the stock’s price cannot fall below zero. The losses are also capped because the trader can let the options expire worthless if prices move in the opposite direction. Therefore, the maximum losses that the trader will experience are limited to the premium amounts paid. Long puts are useful for investors when they are reasonably certain that a stock’s price will move in their desired direction.

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• Short Put

In a short put, the trader will write an option betting on a price increase and sell it to buyers. In this case, the maximum gains for a trader are limited to the premium amount collected. However, the maximum losses can be unlimited because she will have to buy the underlying asset to fulfill her obligations if buyers decide to exercise their option. Despite the prospect of unlimited losses, a short put can be a useful strategy if the trader is reasonably certain that the price will increase. The trader can buy back the option when its price is close to being in the money and generates income through the premium collected.

https://www.investopedia.com/options-basics-tutorial-4583012

• Options Spreads

Options spreads are the basic building blocks of many options trading strategies. A spread position is entered by buying and selling equal number of options of the same class on the same underlying security but with different strike prices or expiration dates. An option spread shouldn't be confused with a spread option. The three main classes of spreads are the horizontal spread, the vertical spread and the diagonal spread. They are grouped by the relationships between the strike price and expiration dates of the options involved.

https://en.wikipedia.org/wiki/Options_spread

• Vertical Spreads

In options trading, a vertical spread is an options strategy involving buying and selling of multiple options of the same underlying security, same expiration date, but at different strike prices. They can be created with either all calls or all puts. The term originates from the trading sheets that were used in the open outcry pits on which option prices were listed out by expiry date & strike price, thus looking down the sheet (vertical) the trader would see all options of the same maturity. Vertical spreads can sometimes approximate binary options, and can be produced using vanilla options.

https://en.wikipedia.org/wiki/Options_spread

• Calendar Spreads

In finance, a calendar spread also called a time spread or horizontal spread is a spread trade involving the simultaneous purchase of futures or options expiring on a particular date and the sale of the same instrument expiring on another date. These individual purchases, known as the legs of the spread, vary only in expiration date; they are based on the same underlying market and strike price. The usual case involves the purchase of futures or options expiring in a more distant month the far leg and the sale of futures or options in a more nearby month--the near leg.

https://en.wikipedia.org/wiki/Options_spread

• Debit Spreads

A debit spread, or a net debit spread, is an options strategy involving the simultaneous buying and selling of options of the same class with different strike prices requiring a net outflow of cash, or a "debit," for the investor. The result is a net debit to the trading account. Here, the sum of all options sold is lower than the sum of all options purchased, therefore the trader must put up money to begin the trade. The higher the debit spread, the greater the initial cash outflow the trader incurs on the transaction.

https://www.investopedia.com/terms/d/debitspread.asp

• How a Debit Spread Works

Spread strategies in options trading typically involve buying one option and selling another of the same class on the same underlying security with a different strike price or a different expiration. However, many types of spreads involve three or more options but the concept is the same. If the income collected from all options sold results in a lower monetary value than the cost of all options purchased, the result is a net debit to the account, hence the name debit spread.

The converse is true for credit spreads. Here, the value of all options sold is greater than the value of all options purchased so the result is a net credit to the account. In a sense, the market pays you to put on the trade.

https://www.investopedia.com/terms/d/debitspread.asp

• Example of a Debit Spread

For example, assume that a trader buys a call option for $2.65. At the same time, the trader sells another call option on the same underlying security with a higher strike price of $2.50. This is called a bull call spread. The debit is $0.15, which results in a net cost of $15 ($0.15 * 100) to begin the spread trade.

Although there is an initial outlay on the transaction, the trader believes that the underlying security will rise modestly in price, making the purchased option more valuable in the future. The best-case scenario happens when the security expires at or above the strike of the option sold. This gives the trader the maximum amount of profit possible while limiting risk.

The opposite trade, called a bear put spread, also buys the more expensive option (a put with a higher strike price) while selling the less expensive option (the put with a lower strike price). Again, there is a net debit to the account to begin the trade.

https://www.investopedia.com/terms/d/debitspread.asp

• Debit Spread Profit Calculations

The breakeven point for bullish (call) debit spreads using only two options of the same class and expiration is the lower strike (purchased) plus the net debit (total paid for the spread). For bearish (put) debit spreads, the breakeven point is calculated by taking the higher strike (purchased) and subtracting the net debit (total for the spread).

For a bullish call spread with the underlying security trading at $65, here's an example:

Buy the $60 call and sell the $70 call (same expiration) for a net debit of $6.00. The breakeven point is $66.00, which is the lower strike (60) + the net debit (6) = 66.

Maximum profit occurs with the underlying expiring at or above the higher strike price. Assuming the stock expired at $70, that would be $70 - $60 - $6 = $4.00, or $400 per contract.

Maximum loss is limited to the net debit paid.

https://www.investopedia.com/terms/d/debitspread.asp

• Credit Spread

A credit spread is the difference in yield between a U.S. Treasury bond and another debt security of the same maturity but different credit quality. Credit spreads between U.S. Treasuries and other bond issuances are measured in basis points, with a 1% difference in yield equal to a spread of 100 basis points. As an example, a 10-year Treasury note with a yield of 5% and a 10-year corporate bond with a yield of 7% are said to have a credit spread of 200 basis points. Credit spreads are also referred to as "bond spreads" or "default spreads." Credit spread allows a comparison between a corporate bond and a risk-free alternative.

A credit spread can also refer to an options strategy where a high premium option is written and a low premium option is bought on the same underlying security. This provides a credit to the account of the person making the two trades.

https://www.investopedia.com/terms/c/creditspread.asp

• Covered Call

With calls, one strategy is simply to buy a naked call option. You can also structure a basic covered call or buy-write. This is a very popular strategy because it generates income and reduces some risk of being long on the stock alone. The trade-off is that you must be willing to sell your shares at a set price– the short strike price. To execute the strategy, you purchase the underlying stock as you normally would, and simultaneously write–or sell–a call option on those same shares.

For example, suppose an investor is using a call option on a stock that represents 100 shares of stock per call option. For every 100 shares of stock that the investor buys, they would simultaneously sell one call option against it. This strategy is referred to as a covered call because, in the event that a stock price increases rapidly, this investor's short call is covered by the long stock position.

https://www.investopedia.com/trading/options-strategies

• Married Put

In a married put strategy, an investor purchases an asset—such as shares of stock—and simultaneously purchases put options for an equivalent number of shares. The holder of a put option has the right to sell stock at the strike price, and each contract is worth 100 shares.

An investor may choose to use this strategy as a way of protecting their downside risk when holding a stock. This strategy functions similarly to an insurance policy; it establishes a price floor in the event the stock's price falls sharply.

For example, suppose an investor buys 100 shares of stock and buys one put option simultaneously. This strategy may be appealing for this investor because they are protected to the downside, in the event that a negative change in the stock price occurs. At the same time, the investor would be able to participate in every upside opportunity if the stock gains in value. The only disadvantage of this strategy is that if the stock does not fall in value, the investor loses the amount of the premium paid for the put option.

https://www.investopedia.com/trading/options-strategies

• Bull Call Spread

In a bull call spread strategy, an investor simultaneously buys calls at a specific strike price while also selling the same number of calls at a higher strike price. Both call options will have the same expiration date and underlying asset. This type of vertical spread strategy is often used when an investor is bullish on the underlying asset and expects a moderate rise in the price of the asset. Using this strategy, the investor is able to limit their upside on the trade while also reducing the net premium spent (compared to buying a naked call option outright).

https://www.investopedia.com/trading/options-strategies

• Bear Put Spread

The bear put spread strategy is another form of vertical spread. In this strategy, the investor simultaneously purchases put options at a specific strike price and also sells the same number of puts at a lower strike price. Both options are purchased for the same underlying asset and have the same expiration date. This strategy is used when the trader has a bearish sentiment about the underlying asset and expects the asset's price to decline. The strategy offers both limited losses and limited gains.

https://www.investopedia.com/trading/options-strategies

• Protective Collar

A protective collar strategy is performed by purchasing an out-of-the-money put option and simultaneously writing an out-of-the-money call option. The underlying asset and the expiration date must be the same. This strategy is often used by investors after a long position in a stock has experienced substantial gains. This allows investors to have downside protection as the long put helps lock in the potential sale price. However, the trade-off is that they may be obligated to sell shares at a higher price, thereby forgoing the possibility for further profits.

An example of this strategy is if an investor is long on 100 shares of IBM at $50 and suppose that IBM rises to $100 as of January 1. The investor could construct a protective collar by selling one IBM March 105 call and simultaneously buying one IBM March 95 put. The trader is protected below $95 until the expiration date. The trade-off is that they may potentially be obligated to sell their shares at $105 if IBM trades at that rate prior to expiry.

https://www.investopedia.com/trading/options-strategies

• Long Straddle

A long straddle options strategy occurs when an investor simultaneously purchases a call and put option on the same underlying asset with the same strike price and expiration date. An investor will often use this strategy when they believe the price of the underlying asset will move significantly out of a specific range, but they are unsure of which direction the move will take. Theoretically, this strategy allows the investor to have the opportunity for unlimited gains. At the same time, the maximum loss this investor can experience is limited to the cost of both options contracts combined.

https://www.investopedia.com/trading/options-strategies

• Long Strangle

In a long strangle options strategy, the investor purchases an out-of-the-money call option and an out-of-the-money put option simultaneously on the same underlying asset with the same expiration date. An investor who uses this strategy believes the underlying asset's price will experience a very large movement but is unsure of which direction the move will take.

For example, this strategy could be a wager on news from an earnings release for a company or an event related to a Food and Drug Administration (FDA) approval for a pharmaceutical stock. Losses are limited to the costs–the premium spent–for both options. Strangles will almost always be less expensive than straddles because the options purchased are out-of-the-money options.

https://www.investopedia.com/trading/options-strategies

• Long Call Butterfly Spread

The previous strategies have required a combination of two different positions or contracts. In a long butterfly spread using call options, an investor will combine both a bull spread strategy and a bear spread strategy. They will also use three different strike prices. All options are for the same underlying asset and expiration date.

For example, a long butterfly spread can be constructed by purchasing one in-the-money call option at a lower strike price, while also selling two at-the-money call options and buying one out-of-the-money call option. A balanced butterfly spread will have the same wing widths. This example is called a “call fly” and it results in a net debit. An investor would enter into a long butterfly call spread when they think the stock will not move much before expiration.

https://www.investopedia.com/trading/options-strategies

• Iron Condor

In the iron condor strategy, the investor simultaneously holds a bull put spread and a bear call spread. The iron condor is constructed by selling one out-of-the-money put and buying one out-of-the-money put of a lower strike–a bull put spread–and selling one out-of-the-money call and buying one out-of-the-money call of a higher strike–a bear call spread. All options have the same expiration date and are on the same underlying asset. Typically, the put and call sides have the same spread width. This trading strategy earns a net premium on the structure and is designed to take advantage of a stock experiencing low volatility. Many traders use this strategy for its perceived high probability of earning a small amount of premium.

https://www.investopedia.com/trading/options-strategies

• Iron Butterfly

In the iron butterfly strategy, an investor will sell an at-the-money put and buy an out-of-the-money put. At the same time, they will also sell an at-the-money call and buy an out-of-the-money call. All options have the same expiration date and are on the same underlying asset. Although this strategy is similar to a butterfly spread, it uses both calls and puts (as opposed to one or the other).

This strategy essentially combines selling an at-the-money straddle and buying protective “wings.” You can also think of the construction as two spreads. It is common to have the same width for both spreads. The long, out-of-the-money call protects against unlimited downside. The long, out-of-the-money put protects against downside (from the short put strike to zero). Profit and loss are both limited within a specific range, depending on the strike prices of the options used. Investors like this strategy for the income it generates and the higher probability of a small gain with a non-volatile stock.

https://www.investopedia.com/trading/options-strategies