What are options?

Options are contracts between two people who are willing to buy or sell an investment at a specific price in the future.

Do more with your current investments

Option strategies sit “on top” of your existing holdings, making it easier to achieve desired outcomes without the process of selling one investment to buy another.
Generate income on existing stocks, bonds, or cash.
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Protect concentrated stock or a portfolio from severe losses.

Every strategy has its trade-offs

It’s important to know what you gain and what you give up when using option strategies and making sure they align with your goals.

What is your investment goal? Trade-off Potential strategies
Generate additional income on stocks •Sacrifice growth for income •Covered call
Generate additional income on cash •Take on downside equity risk
•Upside limited to income
•Put writing
Manage portfolio risk or help protect the value of an asset •Can be expensive
•Cost can be reduced, but will sacrifice growth
•Protective put

Delivering income with option strategies

Income strategies involve balancing priorities. If you want income with options you have to give up some or all growth potential. This always involves selling an option contract to receive the option premium. Two common strategies are covered calls and put writing.
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Protecting investments with option strategies

Protective strategies may be used to protect a stock or a portfolio from a catastrophic loss. They involve paying a premium for the selected level of protection. Two common strategies are protective puts and collars.
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Learn about payoff graphs

Payoff graphs are a common way to visualize option strategies, but they can be tricky to understand if options are a new concept for you.

Watch our video to better understand how to interpret these graphs.

Option terms

The price paid by the buyer and received by the seller for the contract.
The date that an option contract matures.
Strike Price
The agreed upon price to exchange cash for an asset.

Understanding options risks

  • Option buyers can lose 100% of the premium they paid.
  • Option sellers can be exposed to unlimited losses if they don’t own the underlying security (call writing) or have collateral (put writing).
  • Collars are not guaranteed to be cost neutral.
  • If assigned, an option seller may be forced to buy (or sell) an asset at a less favorable price than the current market.
  • Options may be assigned prior to the expiration date, which can result in missing a dividend payment.
  • Investors should consult with a tax professional on the tax implications of each strategy.