Buying calls is a popular strategy for both novice and experienced options investors. Two reasons you might purchase calls are to profit from an increase in the price of the underlying security or to lock in an appealing purchase price.
Writing a call can be risky depending on whether your position is covered or uncovered. You take less risk by writing a call on stocks you already own, which is also known as writing a covered call.
Like selling calls, buying puts can be an effective strategy that may help protect your assets or provide a profit in a bear market.
When you short a put option, you receive an upfront premium from the buyer. You also could be obligated to buy shares of the underlying stock if the stock falls below the option strike price.
When you sell short or write a cash-secured put, you must have enough money in your account to cover the potential purchase of the underlying security. The exact amount needed is based on the strike price of the option.
Shorting an uncovered or “naked” put is a speculative strategy. If you sell a put option, you will receive the premium, and you could be required to buy the underlying security at the options strike price during the life of the option. Only an account with margin can engage in an uncovered put strategy.
Spread strategies are more complicated than buying or selling a put or a call because they involve entering two options transactions on the same underlying stock or index.
A collar is a spread strategy where you simultaneously purchase a protective put and write a covered call on stock you already own. If you hold a stock whose price has risen sharply, a collar can help you protect those gains against a future drop in price.