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Single Option

Views 4354Oct 9, 2023

Key Takeaways

● There are four basic options trades: buying a call, selling a call, buying a put, and selling a put.

● If investors believe the underlying asset price will increase, they could buy a call or sell a put. On the contrary, if investors think the underlying asset price will decline, they could sell a call or buy a put.

Understanding

Since there are two types of options, puts and calls, either one can be either bought or sold, we obtain a total of four basic option strategies: buying a call, selling a call, buying a put, and selling a put.

Buying a Call

Buying a call gives you the right, but no obligation, to buy the underlying stock at a strike price, and as a condition, you should pay the option premium.

You can profit if the stock rises, and the profit potential is theoretically unlimited for the stock price to rise to infinity.

You will lose if the stock falls, the max loss is limited, and the loss would be your paid for buying the call option.

Selling a Call

Selling a call obligates you to sell the stock at the strike price if the option is assigned, and in return, you will receive the option premium, which is the maximum profit you can make by selling a call.

You will lose when the stock price rises more than the strike price before or at the expiration date.

The max loss is unlimited for the stock price to rise to infinity. People are still selling a call because there is a high probability of success when selling very out-of-the-money calls.

If you are selling a call without any protection, you should carefully watch the market.

Buying a Put

Buying a put gives you the right, but no obligation, to sell the underlying stock at a strike price, and as a condition, you should pay the option premium.

You can profit if the stock falls, and the max profit is the strike price if the stock price falls to zero.

You will lose if the stock rises, the max loss is limited, and the loss would be your paid for buying the put option.

Selling a put

Selling a put obligates you to buy the stock at the strike price if the option is assigned, and in return, you will receive the option premium, which is the maximum profit you can make by selling a put.

You will lose when the stock price falls lower than the strike price before or at the expiration date. The max loss is the strike price minus the premium when the stock price falls to zero.

People are still selling a put because there is a high probability of success when selling very out-of-the-money puts.

If you are selling a put without any protection, you should carefully watch the market.

Options trading entails significant risk and is not appropriate for all customers. It is important that investors read Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Opening new options positions close to or on their expiration date comes with substantial risk of losses for reasons that include potential volatility of the underlying security and limited time to expiration. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount. Supporting documentation for any claims, if applicable, will be furnished upon request.

This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. Past investment performance does not indicate or guarantee future success. Returns will vary, and all investments carry risks, including loss of principal. Moomoo makes no representation or warranty as to its adequacy, completeness, accuracy or timeliness for any particular purpose of the above content.

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