As you may already be aware, calls and puts can be used to place bullish or bearish bets on an underlying stock.

However, there are several compelling reasons to add stock options to your portfolio, even if you're not trying to target a time-sensitive directional move in the shares. While there are many different uses of stock options, most traders are pursuing one of these three goals:. Stock options can be used to speculate on the future price direction of the underlying shares.

Traders predicting positive price action may want to buy calls or long call spreads, while puts and put spreads can be used to capitalize on a stock's expected decline. What's more, calls and puts can be combined in various configurations -- including straddles and strangles, for example -- that allow the trader to benefit from a sharp move in either direction Whether the stock is expected to move up, down, or sideways, there's a viable option strategy that can be used to profit from that particular scenario.

Due to their classification as derivatives, options occasionally get a bad rap as "risky" investing vehicles.

Uses of Stock Options

However, options are actually a crucial tool in how stock options are used to speculate a stock portfolio against the volatile ups and downs in the market. To cite a popular example, put options can be purchased against existing long stock positions to lock in a favorable exit price on the investment.

Depending upon the strike price selected, these "protective puts" can be used to limit losses, or even to guard some unrealized paper profits. Inverting this uganda shilling historical exchange rates, short sellers can buy call options to limit their upside risk, or to lock in paper profits on a winning bearish trade.

During periods of relatively quiet price action, options offer a number of ways to boost your bottom line with premium-collecting strategies. Perhaps the best-known of these is the covered call strategy, wherein an investor sells or writes call options against a stock in his portfolio.

The sale of the call results in an immediate credit, allowing the trader to profit from an otherwise lifeless equity. More seasoned investors can use stock options to play credit spreads, which profit from a stock's sideways price trend. These two-legged option strategies implied volatility can be constructed with either puts or calls, with the best way to make money with smithing on runescape simultaneously selling a higher-priced option and buying a lower-cost option on the same underlying stock.

Should You Speculate with Options?

The ultimate goal is for both options to expire worthless, allowing the trader to retain the initial credit received as his or her maximum profit. MY ACCOUNT CONTACT US SEARCH. ABOUT US NEWS AND ANALYSIS TRADING SERVICES OPTIONS EDUCATION BROKER CENTER 30 FREE TRADES.

Why Use Options

Uses of Stock Options As you may already be aware, calls and puts can be used to place bullish or bearish bets on an underlying stock. While there are many different uses of stock options, most traders are pursuing one of these three goals: Speculation Stock options can be used to speculate on the future price direction of the underlying shares.

How can derivatives be used for speculation? | Investopedia

Hedging Due to their classification as derivatives, options occasionally get a bad rap as "risky" investing vehicles. Generating income During periods of relatively quiet price action, options offer a number of ways to boost your bottom line with premium-collecting strategies.

Advantages of Stock Options Long Call Options Protective Put. About Us Trading Services Contact Us Advertise with Us Sitemap Privacy Policy Additional Legal Notice. Unauthorized reproduction of any SIR publication is strictly prohibited.