Yet these strategies can still be desirable since they usually cost less when compared to a single options leg. Vertical spreads involve selling one option to buy another. Generally, the second option is the same type and same expiration, but a different strike. A bull call spread, or bull call vertical spread, is created by buying a call and simultaneously selling another call with a higher strike price and the same expiration.

The spread is profitable if the underlying asset increases in price, but the upside is limited due to the short call strike. The benefit, however, is that selling the higher strike call reduces the cost of buying the lower one. Similarly, a bear put spread, or bear put vertical spread, involves buying a put and selling a second put with a lower strike and the same expiration. If you buy and sell options with different expirations, it is known as a calendar spread or time spread. Combinations are trades constructed with both a call and a put.

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Why not just buy the stock? Maybe some legal or regulatory reason restricts you from owning it. But you may be allowed to create a synthetic position using options. A butterfly consists of options at three strikes, equally spaced apart, where all options are of the same type either all calls or all puts and have the same expiration.

In a long butterfly, the middle strike option is sold and the outside strikes are bought in a ratio of buy one, sell two, buy one. If this ratio does not hold, it is not a butterfly. The outside strikes are commonly referred to as the wings of the butterfly, and the inside strike as the body. The value of a butterfly can never fall below zero. Closely related to the butterfly is the condor - the difference is that the middle options are not at the same strike price.

Because options prices can be modeled mathematically with a model such as the Black-Scholes, 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. Individual risks have been assigned Greek letter names, and are sometimes referred to simply as "the Greeks.

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Below is a very basic way to begin thinking about the concepts of Greeks:. Options do not have to be difficult to understand once you grasp the basic concepts. Options can provide opportunities when used correctly and can be harmful when used incorrectly. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification.

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Online Options Trading | Trading Stock Options the Profitable Way

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Advanced Options Concepts. Table of Contents Expand. What Are Options? Options as Derivatives. Call and Put Options. Call Option Example. Put Option Example. Why Use Options. How Options Work. Types of Options. Reading Options Tables. Options Risks. The Bottom Line. Key Takeaways An option is a contract giving the buyer the right, but not the obligation, to buy in the case of a call or sell in the case of a put the underlying asset at a specific price on or before a certain date.

People use options for income, to speculate, and to hedge risk. Options are known as derivatives because they derive their value from an underlying asset. A stock option contract typically represents shares of the underlying stock, but options may be written on any sort of underlying asset from bonds to currencies to commodities. Buying at the bid and selling at the ask is how market makers make their living. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Articles. European Options.

Partner Links. Related Terms How a Put Works A put option gives the holder the right to sell a certain amount of an underlying at a set price before the contract expires, but does not oblige him or her to do so. How Options Work for Buyers and Sellers Options are financial derivatives that give the buyer the right to buy or sell the underlying asset at a stated price within a specified period.

Put Option Definition A put option grants the right to the owner to sell some amount of the underlying security at a specified price, on or before the option expires. OTM options are less expensive than in the money options. A large stock like IBM is usually not a liquidity problem for stock or options traders.

The problem creeps in with smaller stocks. Take SuperGreenTechnologies, an imaginary environmentally friendly energy company with some promise, might only have a stock that trades once a week by appointment only.

All that glitters isn't a golden options trade

If the stock is this illiquid, the options on SuperGreenTechnologies will likely be even more inactive. This will usually cause the spread between the bid and ask price for the options to get artificially wide. Watch this video to learn more about trading illiquid options. Trading illiquid options drives up the cost of doing business, and option trading costs are already higher, on a percentage basis, than stocks. If you are trading options, make sure the open interest is at least equal to 40 times the number of contacts you want to trade.