An Overview of Options Orders
Options orders are defined simply as an agreement between two investors where one party agrees to deliver something in the stock market to another party within a specific time period and for a specific price. For options orders the standard concept of ownership does not exist because you don’t need to own a particular stock in order to implement a position. Have you purchased a position and now you are interested in short selling that option? In the stock market you would have to borrow the stock to do it; in options trading you only need to understand that there is no ownership and no problem making the transaction.
An options order or stock order, whether it is a “call” (an agreement to purchase) or a “put” (an agreement to sell), gives the holder the right to trade options; in addition, the holder is entitled to simply let the options order expire without investing further. Options orders can be low-risk ways to make money in the stock market because many times you can exit an option order that is unfavorable for only the price of the premium.
Types of Options Orders
Options orders cover in a number of different scenarios, offering the investor the ability to buy or sell and setting conditions for the transactions. The following are some of the options orders that are available:
- Buying Calls – Buying a Call is a bullish options order on an underlying stock value. The investor has the opportunity to speculate on the rise of the stock’s value for the term of the contract with a predetermined risk. Most investors will look to sell their contract at a profit, while others may intend to exercise their right and purchase the underlying shares.
- Buying Puts – Buying Puts is a bearish, somewhat speculative options order in which the investor anticipates that a stock will decrease in price during a set period of time. The trader realizes a profit when the stock and its underlying put option decrease in price during a set amount of time.
- Selling Puts – When you sell puts, you are selling someone the right to sell you the underlying asset at a fixed price, on or before the expiration date of the option order. You can use this options order when you are bullish on the market and feel that it isn’t likely to go down in the short term, you can sell puts on a quality asset that you would like to own at a discount.
- Selling Covered Calls – Selling a covered call is an options order where investors are willing to pay for the right to take a stock if it reaches a much higher price. It is an excellent strategy to implement while waiting for a stock to reach your identified sell point.
- Put Hedge – A Put Hedge is an options order comprised of buying puts during a bearish market to protect stock shares that, while the trader is reluctant to sell, are vulnerable to a decline in the market. Successful traders utilize strategies such as Put Hedges to insulate their portfolios from loss in a bearish market. This method also has the potential of unlimited profits, while at the same time limiting the potential loss by the investor.
- Calendar Spread – A Calendar Spread is an options order that involves selling an option with a date that is close to expiring against the purchase of another option, of the same strike price, that has a later expiration date.
- Selling Bear Calls – Basically, this options order strategy is to buy out-of-the-money call options and sell in-the-money call options on the same stock with the same expiration date. The plan is that the in-the-money stock closes lower than its strike price at its expiration date, and then the trader realizes maximum profits from Selling Bear Calls.
- Selling Strangle – This options order involves selling an out-of-the-money call option and an out-of-the-money put option with different strike prices on the same asset with the same expiration date.
- Selling Straddle – Similar to Selling Strangle, this options order is a technique that involves selling a call option and a put option on the same asset with the same strike price and expiration date.
- Buying Strangle – A strangle buy is implemented by purchasing a call option and a put option on the same asset with the same strike price and expiration date.
- Buying Straddle – A buy straddle is implemented by purchasing a call option and a put option on the same asset with the same strike price and expiration date. This is a desirable move because the risk is limited to losing the premium paid but its reward is unlimited.
Conclusion
There are quite a few more options orders available for your use; discussing your options orders with your broker can help to identify those that are available to you. Whether you are looking to capitalize on an upward movement of a stock or make defensive profits in a bear market, options are an excellent way to make money investing in the stock market.
