10 Options Strategies to Know

The most profitable strategies in options

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When getting started with options, it is advantageous to work with strategies that allow you to be confident that you know how to open, manage, and close your positions. That notice is simply a message from your broker telling you that your short option was exercised and that you automatically sold shares at the strike price. Your option position has disappeared once exercised, the option no longer exists and the stock has been removed from your account.

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The cash will appear when the stock sale settles in three days. You, as the option seller, have no say about the most profitable strategies in options the option is exercised or not. That decision belongs to the option owner. If that does not seem fair, just remember that the buyer paid cash to obtain that right.

If the option owner fails to exercise when that date arrives the cutoff time is roughly 30 minutes after the market closes on expiration dayyour obligation ends, and the call option expires worthless.

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The cash premium that you collected when selling the option is not part of the contract. That premium only describes the trade that was made on the floor of one of the option exchanges. When you write a covered call, there are only two possible outcomes. Either way, you should be pleased.

10 Options Strategies to Know

In addition, you get to keep the cash premium. The option expires worthless. You are ahead of the game by the cash premium collected.

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You still own the stock and may — if you so choose — write another call option and collect another premium. If it sounds appealing, then it is time to begin learning much more about the details of how to implement covered call writing.

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If CCW is unappealing, then consider another strategy from the list. Naked Puts When you sell an out-of-the-money i. That cash is yours to keep, no matter what else happens. There are two possible outcomes of this trade: The option expires worthless the stock price is above the strike priceand your profit is the cash collected.

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When expiration arrives, the stock price is below the strike price. The transaction is made automatically, just as when you are assigned an exercise notice on the call you sold when writing covered calls. When selling the put option, you were willing to buy stock at the strike. If and when you are assigned an exercise notice, you may no longer want to own the stock.

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But look at it this way: If you had bought stock at its market price earlier when you sold the put option insteadyou would have paid a higher price, and you would not have collected the cash premium. Credit Spreads Instead of selling unprotected naked options, the trader can sell one put and buy another.

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The put purchased acts as an insurance policy, limiting loss. We all want to be positive thinkers, but winning traders know that the main objective is to prevent a monetary disaster.

Additionally, selling vertical credit spreads provides much less flexibility.

Loss limits accomplish that. Although this is one of the most popular for good reasons option strategies, newer option traders should understand the basics of trading individual options before getting into spread trading. Because it is easier to understand how a spread works when you know how its components work.

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Collars This is the most conservative of the strategies listed here. It is for people who are more interested in preserving their capital than in trying to earn a lot more money.

The collar is a slightly bullish position with limited gains and limited losses.

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