Options Strategies: Benefits, Rewards, and Risks

Benefits, Rewards, and Risks of writing a covered call?

Writing (selling) a covered call is a more conservative strategy and is a way of generating income on a stock position owned by the investor. A covered call is typically written when an investor is neutral to bullish on a stock, but does not expect its price to change much for the duration of the options contract.

While the reward is generally limited to the premium received minus trading costs, an investor who writes a covered call continues to own the underlying stock. By still owning the stock, the investor maintains the benefits of receiving dividends and the right to vote.

The risk of writing a covered call is the loss of the underlying shares if the seller (writer) of the call is assigned an exercise notice. If assignment occurs, or the strike price is in the money at expiration, then the writer is obligated to sell the shares of the underlying stock at the option contract's strike price. Keep in mind, the seller of the call receives the proceeds of the sale (minus any assignment charges).

Please note: Options involve risk and are not suitable for all investors. Before investing in options, please read the Characteristics and Risks of Standardized Options.

Benefits, Rewards, and Risks of buying a long call?

Typically, an investor buys a long-call when they think the underlying stock or ETF is going to go up in price. One advantage of buying a long-call option instead of buying the underlying security is that less monies are required to buy the call option.

As the price of the underlying security rises, the price of the options contract can go up with it.

The maximum gain potential on a long call is unlimited. The maximum loss on a long call option is limited to the amount you paid for the contract. Remember – when you own a long call you don't own the stock so you don't receive dividends or have the right to vote.

For more details about buying long calls, visit the Education section.

Please note: Options trading involves risk and isn't perfect for every investor. Before investing in options, please read the Characteristics and Risks of Standardized Options.

Benefits, Rewards, and Risks of Buying a Long Put

An investor typically buys a put when their view or opinion on a stock or ETF is bearish. Buying puts without owning shares of the underlying stock is a strategy an investor uses when the investor has a bearish speculation on the stock or ETF. The primary motivation of this investor is to realize financial reward from a decrease in price of the underlying security.

As the price of the underlying security decreases, the price of the options contract will generally increase.

While the reward for a long put is limited only by the price of the stock declining to no less than zero, the maximum loss on a long put option is limited to the premium paid.

More details about buying long puts

Please note: Options involve risk and are not suitable for all investors. Before investing in options, please read the Characteristics and Risks of Standardized Options.

What is a call option?

An option contract giving the owner the right (but not the obligation) to buy a specified amount of an underlying security, typically 100 shares per contract, at a specified price within a specified time.

Please note: Options involve risk and are not suitable for all investors. Before investing in options, please read the Characteristics and Risks of Standardized Options.

What is a put option?

Investors who buy put options think the underlying security will drop in price within a certain time frame. The owner of a put has the ability to sell a specific amount of the underlying security, typically 100 shares per contract, if the contract reaches the specified price.

Please note: Options involve risk and are not suitable for all investors. Before investing in options, please read the Characteristics and Risks of Standardized Options.

What does "in-the-money" mean?

The In-The-Money calculation method used within the option chains is basic. It simply compares the strike price of the option with the last price of the underlying security.

For a call option, the option is in-the-money when the market price of the underlying security is at or above the option's strike price.

For a put option, the option is in-the-money when market price of the underlying security is at or below the option's strike price.

Please note: Options trading involves risk and isn't suitable for every investor. Before investing in options, please read the Characteristics and Risks of Standardized Options.