Investing Basics
Options: Options Strategies
TSC Staff
10/19/05 - 07:39 PM EDT
Feeling like a married put? How about a long straddle?
While these may sound like rather kinky propositions, they actually are just two of the scores of options strategies that investors use in an effort to secure or maximize profits. Options traders have devised these strategies for a variety of reasons; some offer a kind of insurance against a decline in a stock you own. Some are ways to make risky bets with big upside and downside potential.
Options let you make a bet on the direction of an underlying investment -- such as a stock, a stock index or a currency -- without shelling out the full amount to buy the actual underlying investment. Part of the appeal options hold for investors is leverage. When investors leverage an investment, they pay a small amount out in the hopes that they get a return much larger than their original money down. (For more on the basics of options, please read the entry on
Getting Started With Options
.)
There are far too many types of options strategies to discuss in this introduction. But every week, TheStreet.com's Options Forum focuses on various ways investors use options. In the meantime, the articles below, many culled from the Options Forum, address some of the strategies out there.
What about those kinky strategies listed above, you ask? Here you are:
Married puts are when an investor buys a stock and a put (an option to sell in which an investor makes a profit when the stock declines) of that same stock at the same time. Why would someone do something so contradictory? Insurance: If the stock goes up, you ride the stock for profits and let the put option expire. If the stock falls, the put option grows in value and helps offset the decline in the underlying stock.
Long straddles occur when an investor buys both a call (an option to buy) and a put (an option to sell) at the same set price (the strike price) with the same expiration date. Long straddles let investors be both bullish and bearish, while still maintaining a limited risk plan. The straddle can be one of the most costly options trades in your arsenal, since you are buying both the call and the put, but that's the trade-off for giving up the directional bias of profit-making.