Option trading summary

Option Summary.

Options Basics.

Option Summary View.

OPTIONS BASICS.

What are the different levels of option trading available at Fidelity?

Below are the five levels of option trading, defined by the types of option trades you can place if you have an Option Agreement approved and on file with Fidelity.

The option trades allowed for each of the five option trading levels:

Covered call writing of equity options.

Level 1, plus purchases of calls and puts (equity, index, currency and interest rate index), writing of cash covered puts, and purchases of straddles or combinations (equity, index, currency and interest rate index). Note that customers who are approved to trade option spreads in retirement accounts are considered approved for level 2.

Levels 1 and 2, plus spreads and covered put writing.

Levels 1, 2, and 3, plus uncovered (naked) writing of equity options and uncovered writing of straddles or combinations on equities.

Levels 1, 2, 3, and 4, plus uncovered writing of index options, and uncovered writing of straddles or combinations on indexes.

* Retirement accounts can be approved to trade spreads. A new option application and a Spreads Agreement must be submitted at the same time and approved prior to placing any spread transaction.

What requirements must I meet in order to trade options at Fidelity?

You must meet the following requirements to trade options at Fidelity:

A brokerage account An option agreement on file with the appropriate option level for the trade you're attempting to place A margin agreement on file (depending on the type of trade) Sufficient buying power in your account to cover the margin requirement for the trade.

How do I establish an options trading agreement?

Select Update Accounts/Features under the Accounts & Trade tab, and click Margin and Options under Account Features.

Am I authorized to trade options on margin?

To trade on margin, you must have a Margin Agreement on file with Fidelity. If you do not have a Margin Agreement, you must use cash. To establish a Margin Agreement on an account, select Update Accounts/Features under the Accounts & Trade tab, and click Margin and Options under Account Features.

What is a multi-leg option?

Multi-leg options are two or more option transactions, or "legs," bought and/or sold simultaneously in order to achieve a certain investment goal. Typically, multi-leg options are traded according to a particular multi-leg option trading strategy. For more information, see Trading Multi-leg Options.

What are call and put options?

With a call option, the buyer has the right to buy shares of the underlying security at a specific price for a specified time period. With a put option, the buyer has the right to sell shares of the underlying security at a specified price for a specified period of time.

Where can I go to learn more about option trading?

You can learn more about trading options through Fidelity’s Learning Center at Research > Learning Center.

OPTION SUMMARY VIEW.

What are the different option strategies and other positions included in the Option Summary view?

Below is a list of the option strategies included in the option summary view, and their definitions.

Cash Covered Put.

A short put position in a cash account that is secured by setting aside cash equal to 100% of the exercisable value of the put contract(s).

The collar spread, also called a "fence," is the simultaneous purchase of an out-of-the-money put and sale of an out-of-the-money covered call. Under normal circumstances, the protective put and covered call comprising the collar share the same expiration dates, but have different strike prices. A covered call is sold on a share-for-share basis against the underlying stock. For example, for stock XYZ currently trading at $50, buying 100 shares of XYZ, selling an XYZ 55 call, and buying an XYZ 45 put creates a collar. The trader is protected if the stock drops below the strike price of the put, and forfeits any profits should the stock rise above the strike price of the call. Traders who are moderately bullish on an underlying stock, but lacking strong conviction, often employ collar spreads. The strike price of the call determines the degree of bullishness of the strategy. The further the call moves out-of-the-money, the more bullish the strategy becomes.

Short 10 Call XYZ 125.

Long 10 Put XYZ 115.

Conversion.

An options trading arbitrage strategy in which a customer takes a long position in an underlying stock and offsets that holding with the simultaneous purchase of an at-the-money put and sale of an at-the-money call with the same expiration. The two options create a synthetic short stock, and the customer holds parallel long and short positions. The strategy is meant to take advantage of overpriced options, and the profit is made in the premium difference between the call and the put.

Short 10 Call XYZ 120.

Long 10 Put XYZ 120.

Convertible Hedge.

Convertible bonds covering short calls and short common stock.

Covered Call.

In a covered call, also known as a covered-write or buy/write, a customer sells, or "writes," a call option against a long stock position. By writing an option, the customer receives a cash credit. If a customer sells calls against an existing position, the strategy is called a covered-call or covered-write. If the customer purchases the underlying stock and sells calls against it simultaneously, the strategy is called a buy/write.

Short 10 XYZ 105 Call.

Covered Put.

An options strategy in which an investor writes a put option and simultaneously holds a short position in the underlying stock.

Short 10 XYZ 50 Put.

Credit Spread.

An options strategy consisting of the buying and selling of options on the same underlying stock, in which the credit from the sale is greater than the cost of the purchase, resulting in a credit at the time of entry into the strategy. In a credit spread, the credit received from entering the position is the maximum profit achievable through the strategy.

Puts - Puts - Long put strike is lower than the short put strike.

Debit Spread.

An options strategy consisting of the buying and selling of options on the same underlying stock, in which the cost of the option purchases is greater than the proceeds of the sale, resulting in a debit at the time of entry into the strategy. Breaking even or profiting from a debit spread requires that the value of the purchased options increase to cover at least the debit.

Puts - Short put strike is lower than the long put strike.

An options strategy in which one leg is a short position in a stock and the second leg is a call that hedges against loss in the case of a rise in the price of the underlying.

Long Put Option.

Long Box Spread.

An options trading arbitrage strategy in which two vertical spreads, a bull call spread and a short bear spread, are purchased together to take advantage of underpriced contracts. The profit is made in the premium difference between the spreads.

The strike prices of the short call and the long put must be equal.

The strike price of the long call and the short put must be less than the strike price short call and the long put.

Long 10 Put XYZ 125.

Short 10 Put XYZ 120.

Long Butterfly Spread.

An options strategy composed of four options contracts at three strike prices for the same class (call or put) on the same expiration date: one bought in-the-money, two sold at-the-money, and one bought out-of-the-money. Loss and profit are both limited in this strategy, and maximum profit is achieved when the underlying price doesn't change.

Short 20 Call XYZ 125.

Long 10 Call XYZ 130.

Long Calendar Butterfly Spread.

An options trading strategy comprised of entering a calendar spread and a butterfly spread. This is a combined strategy that can create a discounted long position with the downside protection of the limiting loss to the premium of the contracts.

Short 2 XYZ Jun 55 Call.

Long 1 XYZ Jun 60 Call.

Long Calendar Condor Spread.

An options trading strategy comprised of a entering a long calendar spread and two long butterfly spreads. This is a combined strategy that can create a discounted long position with the downside protection limiting loss to the premium of the contracts.

Short 1 XYZ Jun 55 Call.

Short 1 XYZ Jun 60 Call.

Long 1 XYZ Jun 65 Call.

A bullish options strategy in which the customer buys call contracts with the intention of profiting if the underlying stock price rises above the strike price before expiration. Losses are limited to the premium paid for the options, and profit potential is unlimited.

Long Condor Spread.

Also known as a "flat butterfly" or an "elongated butterfly," a four-leg spread. In a long call condor spread, there is a long call of a lower strike price, one short call of a second strike price, one short call of a third strike price, and a long call of a fourth strike price. Each call has the same expiration date, and the strike prices are an equal distance apart.

Short 10 Call XYZ 125.

Short 10 Call XYZ 130.

Long 10 Call XYZ 135.

A bearish options strategy in which the customer buys put contracts with the intention of profiting if the underlying stock price falls below the strike price before expiration of the option. It is similar to shorting a stock, but with an expiration date. Unlike shorting a stock, a customer does not need to borrow stock, and limits losses to the premium paid for the options.

Naked Call.

The writing of call contracts without owning the underlying stock. The maximum profit is the amount of premium collected, but the risk is significant, as with short-selling.

The writing of a put contract without also short selling the underlying stock or having an affiliated position. The maximum profit is the premium collected. The maximum risk is the strike price sold less the premium received. This strategy is commonly used by investors who are looking to accumulate shares in the underlying stock.

Protective Put.

An options strategy in which a long equity position's unrealized profit is protected by the purchase of put options. The options serve as the equivalent of a stop loss order, giving the customer the right to sell the equity at the strike price, limiting the diminished profit from a decline in the share price.

Long 10 XYZ 50 Put.

Reverse Conversion.

An options trading arbitrage strategy in which a customer takes a short position in an underlying stock and offsets that with the simultaneous sale of an at-the-money put and purchase of an at-the-money call with the same expiration. The two options create a synthetic long stock, and the customer holds parallel long and short positions. The strategy is meant to take advantage of underpriced options, and the profit is made in the premium difference between the call and the put.

Short 10 XYZ 50 Put.

Long 10 XYZ 50 Call.

Short Box Spread.

An options trading arbitrage strategy in which two vertical spreads, a bull call spread and a short bear spread, are sold together to take advantage of overpriced contracts. The profit is made in the premium difference between the spreads.

Short 10 XYZ 120 Call.

Long 10 XYZ 120 Put.

Short 10 XYZ 125 Put.

Short Butterfly Spread.

An options strategy most profitable when the underlying will be volatile, it is composed of four options contracts at three strike prices for the same class (call or put) on the same expiration date: one sold in-the-money, two bought at-the-money, and one sold out-of-the-money. Loss and profit are both limited in this strategy, and maximum profit is achieved when the underlying price changes significantly, past either the highest or lowest strike price agreed to.

Long 20 XYZ 125 Call.

Short 10 XYZ 130 Call.

Short Calendar Iron Butterfly Spread.

An options strategy comprised of a entering a long calendar spread, a long butterfly spread and a short box spread.

Short Calendar Iron Condor Spread.

An options strategy comprised of a entering a long calendar spread, two long butterfly spreads and a short box spread.

Short Iron Butterfly Spread.

An options trading strategy in which the customer sells an out-of-the-money put, buys an at-the-money put, buys an at-the-money call and sells an out-of-the-money call. The trade results in a net debit which is the maximum loss possible. This will occur if the underlying price is unchanged at expiration. The strategy is most profitable if the underlying price changes significantly, past either the highest or lowest strike price agreed to.

Short 10 XYZ 125 Put.

Short 10 XYZ 125 Call.

Long 10 XYZ 130 Call.

Short Iron Condor Spread.

An options strategy involving four strike prices that has both limited risk and limited profit potential. It is established by buying one put at the lowest strike, writing one put at the second strike, writing a call at the third strike, and buying another call at the fourth (highest) strike. Maximum profit is achieved when the underlying stock remains stable and all of the contracts expire worthless.

Short 10 XYZ 125 Put.

Short 10 XYZ 135 Call.

Long 10 XYZ 140 Call.

Short vs. Box.

The short selling of an asset you hold an equivalent or greater long position in. This may be accomplished by trading an equity or buying or writing options.

A type of complex options trade order that 1) is the simultaneous purchase of puts and calls or the sale of puts and calls, and 2) consists of options with the same strike price and same expiration month. For example, 1) sell 1 IBM JAN 125 call and 2) sell 1 IBM JAN 125 put. To place a long straddle order, you must be approved for option trading level two or higher. To write a straddle, you must have a Margin Agreement on file with Fidelity and be approved for option trading level four or higher.

Long 10 XYZ 50 Put.

Long 10 XYZ 50 Call.

Short 10 XYZ 50 Put.

Short 10 XYZ 50 Call.

A strangle is a multi-leg options trading strategy involving a long call and a long put, or a short call and a short put, where both options have the same expiration date, but different strike prices.

Long 10 XYZ 45 Put.

Long 10 XYZ 50 Call.

Short 10 XYZ 45 Put.

Short 10 XYZ 50 Call.

Unpaired Position.

A stock, convertible bond or convertible preferred held by a customer, on which listed options are not currently owned or written but may be.

How are my options paired and what are the requirements?

Your positions, whenever possible, will be paired or grouped as strategies, which can reduce margin requirements and provide you a much easier view of your positions, risk, and performance. Strategies displayed will include those entered into as multi-leg trade orders as well as those paired from positions entered into in separate transactions. Pairings may be different than your originally executed order and may not reflect your actual investment strategy.

When you buy to open an option and it creates a new position in your account, you are considered to be long the options.

Requirement: 100% cash upfront.

Buy 10 XYZ Jan 20 Calls at $1; Cost = 10 (number of contracts) x 1 (option price) x 100 (option multiplier) = $1,000.

The account consists of: Long 10 XYZ Jan 20 Calls.

There are two types of spreads: debit and credit. If you are attempting to open spread positions you must maintain a minimum net worth of $10,000 for both equity and indexes in your account. This requirement applies to all eligible account types for spread trading.

*Retirement accounts can be approved to trade spreads. A new option application and a Spreads Agreement must be submitted at the same time and approved prior to placing any spread transaction.

Retirement accounts can be approved to trade spreads. A new option application and a Spreads Agreement must be submitted at the same time and approved prior to placing any spread transaction. If you are approved for spreads trading in your retirement account you must maintain a minimum Cash Spreads Reserve Requirement of $2,000. This $2,000 requirement is in addition to the margin requirement for debit spreads, but can be counted towards the margin requirement on credit spreads.

Debit Spread Requirements Full payment of the debit is required. Initial spread transactions require an additional cash amount of the minimum cash requirement (also called the cash spread reserve) of $2,000. The minimum cash requirement is a one-time assessment and must be maintained while you hold spreads in your retirement account.

In this example, the first spread order placed is:

Buy 10 ABC Jan 50 Calls at $3.

Sell 10 ABC Jan 55 Calls at $1.

To calculate the debit spread requirement :

Net debit (2.00) x number of contracts (10) x multiplier (100) = Debit ($2,000)

To calculate the cash reserve debit :

$2,000 (debit) + $2,000 (minimum cash requirement) = $4,000 (total cash reserve debit)

The account consists of:

Cash spread reserve (requirement) = $2,000.

Long 10 ABC Jan 50 Calls.

Short 10 ABC Jan 55 Calls.

Credit Spreads Requirements.

You must make full payment of the credit spread requirement.

Initial spread transactions require you to meet the minimum cash requirement, also called the cash spread reserve, of $2,000.

The minimum equity requirement is a one-time assessment and must be maintained while you hold spreads in your retirement account.

Important: Credit spread requirements can be met by the minimum cash reserve up to $2,000. If the spread requirements are greater than $2,000 you must have the available cash to meet the debit or credit spread requirement.

Buy 15 XYZ Mar 60 Puts at $1.00.

To calculate the spread requirement: Total spread requirement ($6,000) = $7,500 (Difference between the strike prices x number of contracts x multiplier) – $1,500 (cash received)

The account consists of:

Cash spread reserve (requirement) = $7,500 ($6,000 cash reserve debit plus $1,500 credit received)

Spread: Short 10 XYZ Mar 65 Puts Long 10 XYZ Mar 60 Puts.

Buy 5 XYZ Mar 60 Puts at $1.50.

To calculate the spread requirement: Total spread requirement ($2,000) = $2,500 (Difference between the strike prices x number of contracts x multiplier) - $500 (credit received)

The account consists of:

Cash spread reserve (requirement) = $2,000 ($2,000 spread requirement)

Spread: Sell 5 XYZ Mar 50 Calls Buy 5 XYZ Mar 55 Calls.

Debit Spreads Requirement.

Full payment of the debit is required.

Buy 10 XYZ 20 Calls at $2.

Sell 10 XYZ 25 Calls at $.50.

Net Debit = $1.50 or (Long Premium $2 – Short Premium $.50) x 10 (contracts) x 100 (multiplier) = $1,500.

The account consists of:

Long 10 XYZ Jan 20 Calls.

Short 10 XYZ Jan 25 Calls.

Credit Spreads Requirements.

Whichever is lower: The greater of the two naked requirements on the short call, as calculated for naked equity calls The greater of the difference in the strike prices or the difference in the premiums.

Underlying price $55.

Sell 10 XYZ Feb 50 Put at $1.50.

Buy 10 XYZ Feb 45 at $.50 Put.

Net Credit = ($1.50 (short premium) - $.50 (long premium)) x 10 (contracts) x 100 (multiplier) = $1,000.

Difference between Strike prices:

50 (strike price) - 45 (strike price) x 10 (contracts) x 100 (multiplier) = $5,000.

The higher of the Naked Requirement:

(($55 (underlying stock) x .25) - 5 (out of the money) + 1.50 (premium)) x 100 (multiplier) x 10 (contracts) = $10,250 (50 (strike price) x .15 + $1.50 (premium)) x 100 (multiplier) x 10 (contracts) = $9,000.

An option is considered naked when you sell an option without owning the underlying asset or having the cash to cover the exercisable value.

If you are attempting to short naked options you must have a margin account and must maintain a minimum balance of $20,000 for equity and $50,000 for indexes in your account.

Equity calls : The higher of the following requirements:

25% of the underlying stock value, minus the out-of-the-money amount, plus the premium 15% of the underlying stock value, plus the premium.

Equity puts : The higher of the following requirements: 25% of the underlying stock value, minus the out-of-the-money amount, plus the premium Premium plus 15% of the strike price (for both in-the-money and out-of-the-money options)

Index calls : The higher of the following requirements: Broad-based:

20% of the underlying value, minus the out-of-the-money amount, plus the premium 15% of the underlying value, plus the premium Narrow-based:

25% of the underlying value, minus the out-of-the-money amount, plus the premium 15% of the strike price, plus the premium.

For short straddles or strangles, the requirement is the greater of the two naked option requirements, plus the premium of the other option, in cash or available to borrow.

Requirements are subject to change.

What other features should I know about on the options summary view?

Below is a list of features in the options summary view, and information about how to use them. Group by - Choose the groupings and order in which you would like to view your positions. You can choose to group your positions by: Expiration - Positions will be grouped from the nearest expiration date to the furthest expiration date. Strategies that involve more than one expiration date will be grouped by the nearest expiration date. Unpaired positions or other strategies displayed with no expiration date will be shown below the furthest expiration. Strategy - Positions will be grouped by strategy in alphabetical order. Underlying - Positions will be grouped by Underlying in alphabetical order Show Unpaired Positions (checkbox) - Display or suppress positions that could be used in an option pairing, but are currently not paired with an option position. Current Pairing - Displays how positions within your account are grouped, and the margin requirements being held for each. Strategy - Displays the name of the option strategy used to pair your positions. See strategy definitions for a more detailed description. Quantity - Current number of shares, bonds, or options contracts held. The same security may be split up and used for different pairings. Expiration & Strike - Gives a description of the option contract held. Previous Close - The price used to calculate margin requirements. Margin Requirements - The amount held (if any) to secure an option or stock trading strategy. Current Values - The current values are based on real-time or the most recent price for the related position. Market Values - The market value is calculated by taking the quantity held and multiplying it by the bid if the position is held long, or by the ask if the position is held short. Summary - The summary section at the bottom of the Option Summary page displays total margin requirements and change in current market values for: Option Positions - Margin requirements are related to single - or multi-leg option positions. Market Value is the sum of all option positions.

10 Options Strategies to Know.

10 Options Strategies To Know.

Too often, traders jump into the options game with little or no understanding of how many options strategies are available to limit their risk and maximize return. With a little bit of effort, however, traders can learn how to take advantage of the flexibility and full power of options as a trading vehicle. With this in mind, we've put together this slide show, which we hope will shorten the learning curve and point you in the right direction.

10 Options Strategies To Know.

Too often, traders jump into the options game with little or no understanding of how many options strategies are available to limit their risk and maximize return. With a little bit of effort, however, traders can learn how to take advantage of the flexibility and full power of options as a trading vehicle. With this in mind, we've put together this slide show, which we hope will shorten the learning curve and point you in the right direction.

1. Covered Call.

Aside from purchasing a naked call option, you can also engage in a basic covered call or buy-write strategy. In this strategy, you would purchase the assets outright, and simultaneously write (or sell) a call option on those same assets. Your volume of assets owned should be equivalent to the number of assets underlying the call option. Investors will often use this position when they have a short-term position and a neutral opinion on the assets, and are looking to generate additional profits (through receipt of the call premium), or protect against a potential decline in the underlying asset's value. (For more insight, read Covered Call Strategies For A Falling Market.)

2. Married Put.

In a married put strategy, an investor who purchases (or currently owns) a particular asset (such as shares), simultaneously purchases a put option for an equivalent number of shares. Investors will use this strategy when they are bullish on the asset's price and wish to protect themselves against potential short-term losses. This strategy essentially functions like an insurance policy, and establishes a floor should the asset's price plunge dramatically. (For more on using this strategy, see Married Puts: A Protective Relationship . )

3. Bull Call Spread.

In a bull call spread strategy, an investor will simultaneously buy call options at a specific strike price and sell the same number of calls at a higher strike price. Both call options will have the same expiration month and underlying asset. This type of vertical spread strategy is often used when an investor is bullish and expects a moderate rise in the price of the underlying asset. (To learn more, read Vertical Bull and Bear Credit Spreads.)

4. Bear Put Spread.

The bear put spread strategy is another form of vertical spread​ like the bull call spread. In this strategy, the investor will simultaneously purchase put options at a specific strike price and sell the same number of puts at a lower strike price. Both options would be for the same underlying asset and have the same expiration date. This method is used when the trader is bearish and expects the underlying asset's price to decline. It offers both limited gains and limited losses. (For more on this strategy, read Bear Put Spreads: A Roaring Alternative To Short Selling.)

Investopedia Academy "Options for Beginners"

Now that you've learned a few different options strategies, if you're ready to take the next step and learn to:

Improve flexibility in your portfolio by adding options Approach Calls as down-payments, and Puts as insurance Interpret expiration dates, and distinguish intrinsic value from time value Calculate breakevens and risk management Explore advanced concepts such as spreads, straddles, and strangles.

5. Protective Collar.

A protective collar strategy is performed by purchasing an out-of-the-money put option and writing an out-of-the-money call option at the same time, for the same underlying asset (such as shares). This strategy is often used by investors after a long position in a stock has experienced substantial gains. In this way, investors can lock in profits without selling their shares. (For more on these types of strategies, see Don't Forget Your Protective Collar and How a Protective Collar Works.)

6. Long Straddle.

A long straddle options strategy is when an investor purchases both a call and put option with the same strike price, underlying asset and expiration date simultaneously. An investor will often use this strategy when he or she believes the price of the underlying asset will move significantly, but is unsure of which direction the move will take. This strategy allows the investor to maintain unlimited gains, while the loss is limited to the cost of both options contracts. (For more, read Straddle Strategy A Simple Approach To Market Neutral . )

7. Long Strangle.

In a long strangle options strategy, the investor purchases a call and put option with the same maturity and underlying asset, but with different strike prices. The put strike price will typically be below the strike price of the call option, and both options will be out of the money. An investor who uses this strategy believes the underlying asset's price will experience a large movement, but is unsure of which direction the move will take. Losses are limited to the costs of both options; strangles will typically be less expensive than straddles because the options are purchased out of the money. (For more, see Get A Strong Hold On Profit With Strangles.)

8. Butterfly Spread.

All the strategies up to this point have required a combination of two different positions or contracts. In a butterfly spread options strategy, an investor will combine both a bull spread strategy and a bear spread strategy, and use three different strike prices. For example, one type of butterfly spread involves purchasing one call (put) option at the lowest (highest) strike price, while selling two call (put) options at a higher (lower) strike price, and then one last call (put) option at an even higher (lower) strike price. (For more on this strategy, read Setting Profit Traps With Butterfly Spreads . )

9. Iron Condor.

An even more interesting strategy is the iron condor. In this strategy, the investor simultaneously holds a long and short position in two different strangle strategies. The iron condor is a fairly complex strategy that definitely requires time to learn, and practice to master. (We recommend reading more about this strategy in Take Flight With An Iron Condor, Should You Flock To Iron Condors? and try the strategy for yourself (risk-free!) using the Investopedia Simulator.)

10. Iron Butterfly.

The final options strategy we will demonstrate here is the iron butterfly. In this strategy, an investor will combine either a long or short straddle with the simultaneous purchase or sale of a strangle. Although similar to a butterfly spread, this strategy differs because it uses both calls and puts, as opposed to one or the other. Profit and loss are both limited within a specific range, depending on the strike prices of the options used. Investors will often use out-of-the-money options in an effort to cut costs while limiting risk. (To learn more, read What is an Iron Butterfly Option Strategy?)

Monitor and manage your option portfolio with Option Summary.

Watch this video to learn more about how to use the Option Summary in Active Trader Pro ® to manage and modify your options positions. You’ll see details on gain and loss figures, Greeks, days to expiration, along with quick ways to trade directly from the summary.

Active Trader Pro Options.

Active Trader Pro Options.

Active Trader Pro Options.

Active Trader Pro Options.

Next steps to consider.

Get started today with our customizable trading and portfolio monitoring platform.

Get our 3-step guide to trading the market, plus tools to use along the way.

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Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Before trading options, please read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request.

Greeks are mathematical calculations used to determine the effect of various factors on options.

System availability and response times may be subject to market conditions.

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Summary of bullish options trading strategies.

Introduction.

The first type of trade most beginner options traders make will probably involve a bullish strategy. This is quite understandable, since many traders migrate to options from the world of stock trading where one makes money if the price of the underlying stock moves upwards.

Fortunately there is much more to options trading than only bullish trading strategies.

There are also strategies that primarily aim to make money if the price of the underlying asset remains stagnant and there are strategies where the trader profits if the price of the underlying declines.

Types of bullish strategies.

Bullish strategies fall into two categories: they can either be debit spreads or credit spreads. A debit spread is where the trade is put one for a net debit, i. e. the trader has to pay an upfront premium. A credit spread is where the trader is actually paid to enter into the trade. For a more detailed discussion about debit spreads and credit spreads, see elsewhere on this website.

Basic bullish strategy: the long call.

The long call is probably the most basic bullish options trading strategy one can think of. The risk/reward profile of a typical long call option is given below.

The trade is characterised by the fact that it offers unlimited profit while the maximum loss is limited to the premium paid for the options.

Using time decay to create a bullish position.

A trader who is bullish about the market but who does not want to spend any money upfront can always sell a naked put option. The risk/reward profile in this case is shown in Fig. 9.10(d) below.

This trade is characterised by the limited profit it offers to the upside and the virtually unlimited loss potential to the downside. A trader must be 100% certain the underlying asset price is on the way up before selling ATM naked puts!

A safer approach is to sell far OTM naked puts with a strike price beyond the level where the market might reasonably be expected to drop if things go wrong. Below is an example of such a trade, using 20 OTM naked put options. In this hypothetical example the current asset price = 100.

Although the income from the trade will be much lower than when selling ATM puts, the risk is also much lower. Naked puts with a Delta of between 10% and 15% usually still offer a reasonable premium income while offering a high probability of being profitable by expiration.

Bullish options spreads.

Traders often combine the approaches in Fig. 9.10(b) and Fig. 9.10(d) or (e) to create what is known as an Options Spread. In this way it is possible to create a bullish strategy that is.

cheaper than a simple long call and.

less risky than a naked put.

A simple example of such a strategy is the so-called bull call spread. It is bullish, it uses call options and it is a spread, i. e. it uses both long and short options. Below is a typical bull call spread.

This is a trade that will:

Make a limited loss when the trader is wrong, similar to a long call.

Make a limited profit if the price of the underlying goes up similar to a naked put.

What the trader has created here, therefore, is a trade that is both cheaper than a long call and less risky than a naked put, yet it still profits when the price of the underlying rises. This is typical of the versatility offered only by options trading.