Booyah Breakdown: Know Your Options, Part 2

Let's imagine the stock does tank and is down to $58 by next April. You decide to exercise your put before expiration day, the third Friday of the month. So instead of selling each share for $58, which is what it's trading for in the marketplace, and realizing a $5 gain on each share ($58-$53), your put allows you to sell for $60 and bump your gain to $5.10 per share.

That's because your profit is equal to the strike price less the stock purchase price, plus the premium paid. In our example, that's $60 - $53 - $1.90 = $5.10. So you are securing a $5.10 profit per share.

Your insurance worked.

If, on the flip side, the stock kept going up in price, you'd just let the option expire and be out $1.90. But at least you would be able to sleep at night.

Cover-Up With a Call

But what if you think the stock is going to be flat for a bit, even though you see big upside potential in the long term? Maybe you think the market will be at a standstill because of the upcoming elections. Consider selling a call and getting paid while you wait for the stock to hit its price, suggests Kearney.

Remember, a call gives the holder the right to buy an asset at a certain price within a specific period of time. So in this instance, you could write (sell) a call option on your existing shares, says Gentile. The options guys call this a "covered call" because you already own the shares to "cover" your obligation if the option gets exercised. (If you buy the stock at the same time you write the call contract, the folks in-the-know call that a "buy-write.")