Options Investing Strategies

Options let you choose your investment strategy and make profitable investments in different market conditions.

Buying a Call 

Why Buy a Call

Buying a call is similar to buying stock. You want the price of the stock to go up, making your option worth more, so you can profit.

Why would I buy a call?

When buying a call you’re paying for the option to purchase stock. Since an option is typically for 100 shares of a stock, you’re able to pay less money with the opportunity for higher returns.

How do I make money from buying a call?

After buying, your portfolio value will include this option and its price will change similar to the way a stock’s price changes, meaning its value can go up or down.

You can either sell the option itself for a profit, or wait until expiration to exercise it and buy 100 shares of the stock at the stated strike price per share.

What are the risks?

Once you buy an option, its value goes up and down with the value of the underlying stock. If the stock’s value doesn’t go up enough, your call may expire worthless. However, you’ll never lose more than the price you paid to buy the call.

How risky is each call?

The riskier a call is, the higher the reward will be if your prediction is accurate.

A call option with an expiration date that is further away is less risky because there is more time for the stock to increase in value.  

For buying calls, higher strike prices are also typically riskier because the stock will need to go up more in value to be profitable.

  • High Risk, Short Term: Best if you have a strong, short term belief that the stock will go up.
  • Medium Risk, Medium Term: Best if you expect the stock to steadily climb higher over the next couple of months.
  • Low Risk, Long Term: Best if you have a long term belief in the stock. Considered a cheaper way to buy 100 shares.
Choosing a Call 

Robinhood provides a lot of information that can help you pick the right call to buy. Here are some things to consider:

Break-Even price

The break-even price is the price a stock needs to reach when your contract expires so that you don’t lose money on your investment. Your break-even point is the strike price plus the price you paid for the option.

Strike price

The strike price is the fixed price that you’ll pay per share if you choose to exercise your option and buy the 100 shares. You want the stock price to go above the strike price so you can buy the stock for less than what it's currently trading at.

How do I choose the right strike price?

You should be confident that the stock will at least reach the break-even price between now and the time of expiration. Generally, a higher strike price is cheaper, but you’re at a higher risk of the option becoming worthless. A lower strike price is more expensive, but you’re at a lower risk of losing your money.

Expiration date

Unlike stocks, option contracts expire. When you buy a call, the expiration date impacts the value of the option contract because it sets the timeframe for when you can choose to sell, or exercise your call option. If a contract is not sold or exercised by expiration, it expires worthless.

How do I choose the right expiration date?

The further away the expiration date is, the more money you’ll pay for the contract, but the more time the stock has to reach your break-even price.

Monitoring a Call

How does my option affect my portfolio value?

Buying an option is a lot like buying a stock. You can sell it for a profit, or a loss depending on what’s happening in the market. Either way, it will be part of your total portfolio value.

Where can I monitor it?

You can monitor your option on your homescreen, just like you would with any stocks in your portfolio.

What’s the difference between selling and exercising?

Selling 

Selling a call option lets you collect a return based on what the option contract is worth at the time you sell. If the contract is worth more than when you bought it, you’ll make money. If it’s worth less than when you bought it, you’ll lose money.

Why would I sell?

The main reason people sell their call option is to profit off the increased value of 100 shares of stock without ever needing to buy the stock in the first place.

Exercising

When you exercise a call option you get to buy the 100 shares of stock at the agreed strike price regardless of the stock’s current market value.

Why would I exercise?

You’d exercise because you’d want to keep the stocks in your portfolio after the option expires.  

Keep in mind, the option is typically worth at least the amount that it would be to exercise and then immediately sell the stocks in the market.

What happens if the stock goes past the break-even price?

Before Expiration

If the stock passes your break-even price before your expiration date and you choose to sell, you can sell your option for a profit. However, even if the stock doesn’t pass your break-even price, you can still profit from selling the option itself if it’s worth more than when you bought it.

At Expiration

If the stock passes your break-even price at expiration, you can sell the option and keep the profits, or exercise the option to buy the stocks at a lower price than they’re currently worth.

What happens if the stock goes past the strike price?  

If your option is past the stated strike price, it’s considered to be “in the money.”

 Example

If you buy an option for stock XYZ at a $10.00 strike price and the stock is trading in the market at $13.00, you’re in the money. This is because you have the ability to buy the stock at $10.00, but you can immediately sell the stock for $13.00, making a $3.00 profit per share.

Can I exercise my call before expiration?

Yes. However, it’s generally more advantageous to sell your option back to the market rather than early exercise. If you wish to early exercise, you can email our customer support team.  

Can I sell my call before expiration?

Yes. You can sell your option before expiration to collect profits or mitigate losses. You can do this the same way you’d sell stock:

  1. Tap the option on your home screen.
  2. Tap Trade.
  3. Tap Sell.
Calls at Expiration

What happens at expiration when my stock is near or above the strike price?

If your stock is above or near the strike price at expiration, we’ll automatically exercise or sell it for you, so you don’t need to worry about checking the app.

If you have enough money to buy the shares

We’ll automatically exercise the option and purchase the shares at the stated strike price.  

If you don’t have enough money to buy the shares

We’ll automatically sell the option back to the market a few hours before market close so you can recover the market value of the call option.

Generally, the call option will be worth at least as much as buying the stock at the stated strike price and immediately selling it in the market.

What happens at expiration when my stock is below the strike price?

If your stock doesn’t rise above your strike price by expiration, it’s considered to be out of the money. If your option isn’t sold back to the market, it will simply expire and you’ll lose the entire amount that you paid for the contract, but nothing more.

Buying a Put 

Why Buy a Put

Buying a put is similar to shorting a stock. When buying a put, you want the price of the stock to go down, which will make your option worth more, so you can make a profit.

Why would I buy a put?

You’d buy a put because you’re able to make a profit on a stock going down. You’re able to do this by paying for the option to sell 100 shares of stock at a certain price. If the price of the stock goes below that price, you can sell it for more than it’s worth.

How do I make money from buying a put?

After buying, your portfolio value will include this option and its price will change similar to the way a stock’s price changes, meaning its value can go up or down.

You can either sell the option itself for a profit, or wait until expiration to exercise it and sell 100 shares of the stock at the stated strike price per share.

What are the risks?

Once you buy an option, its value goes up and down with the value of the underlying stock. If the stock’s value doesn’t go down enough, your put may expire worthless. However, you’ll never lose more than the price you paid to buy the put.

How risky is each put?

The riskier a put is, the higher the reward will be if your prediction is accurate.

A put option with an expiration dates that is further away is less risky because there is more time for the stock to decrease in value.  

For buying puts, lower strike prices are also typically riskier because the stock will need to go down more in value to be profitable.  

  • High Risk, Short Term: Best if you have a strong, short term belief that the stock will go down.
  • Medium Risk, Medium Term: Best if you expect the stock to steadily fall lower over the next couple of months.
  • Low Risk, Long Term: Best if you have a long term belief that the stock will go down.
Choosing a Put 

Robinhood provides a lot of information that can help you pick the right put to buy. Here are some things to consider:

Break-Even price

The break-even price is the price a stock needs to fall to before your contract expires so that you don’t lose money on your investment. Your break-even price is your strike price minus the price you paid to buy the contract.

Strike price

The strike price is the fixed price that you’ll receive per share if you choose to exercise your option and sell the 100 shares. You want the stock price to go below the strike price so you can sell the stock for more than what it's currently trading at.

How do I choose the right strike price?

You should be confident that the stock will at least reach the break-even price between now and the time of expiration. Generally, a higher strike price is more expensive, but you’re at a lower risk of losing your money. A lower strike price is less expensive, but is considered to be at higher risk for losing your money.

Expiration date

Unlike stocks, option contracts expire. When you buy a put, the expiration date impacts the value of the option contract because it sets the timeframe for when you can choose to sell, or exercise your put option. If a contract is not sold or exercised by expiration, it expires worthless.

How do I choose the right expiration date?

The further away the expiration date is, the more money you’ll pay for the contract, but the more time the stock has to fall below your break-even price.

Monitoring a Put

How does my option affect my portfolio value?

Buying a put is a lot like buying a stock in how it affects your portfolio value. You can sell it for a profit, or a loss depending on what’s happening in the market. Either way, it will be part of your total portfolio value.

Where can I monitor it?

You can monitor your option on your homescreen, just like you would with any stocks in your portfolio.

What’s the difference between selling and exercising?

Selling

Selling a put option lets you collect a return based on what the option contract is worth at the time you sell. If the contract is worth more than when you bought it, you’ll make money. If it’s worth less than when you bought it, you’ll lose money.

Why would I sell?

There are two main reasons people sell a put.

  1. They don’t own the 100 shares of stock and want to collect a profit from selling the put itself.
  2. They already own the 100 shares of stock and want to keep them.

Exercising

When you exercise a put option you get to sell 100 shares of the stock at the agreed strike price regardless of the stock’s current market value.

Why would I exercise?

You’d exercise because you’d want to sell the stocks in your portfolio when the option expires.  

What happens if the stock goes past the break-even price?

Before Expiration

If the stock goes below your break-even price before your expiration date and you choose to sell your put option, you can sell it for a profit. However, even if the stock doesn’t go below your break-even price, you can still profit from selling the option itself if it’s worth more than when you bought it.

At Expiration

If the stock goes below your break-even price at expiration, you can sell the option and keep the profits, or exercise the option to sell the stocks at a higher price than they’re currently worth.

What happens if my stock stays below the strike price?  

If your stock stays below the stated strike price, it’s considered to be “in the money.”

Example

If you buy a put option for stock XYZ at a strike price of $10.00, and the stock is trading in the market at $8.00 a share, you're in the money. This is because you have the ability to sell the stock at $10.00 a share, when it's currently trading in the market for $8.00 a share, making a $2.00 profit per share.

Can I exercise my put before expiration?

Yes. However, it’s generally more advantageous to sell your option back to the market rather than early exercise. If you wish to early exercise, you can email our customer support team.

Can I sell my put before expiration?

Yes. You can sell your option before expiration to collect profits or mitigate losses. You’d do this the same way you’d sell stock:

  1. Tap the option on your homescreen
  2. Tap Trade
  3. Tap Sell
Puts at Expiration

What happens at expiration when my stock is near or below the strike price?

If your stock is below or near the strike price at expiration, we’ll automatically exercise or sell it for you, so you don’t need to worry about checking the app.

If you already own the shares

If you already own the 100 shares, we’ll automatically exercise it for you and sell your shares at the stated strike price.

If you don’t already own the shares

If you don’t already own the shares, we’ll automatically sell the option back to the market for you a few hours before market close.

Generally, the put option will be worth at least as much as buying the stock in the market and immediately selling it at the stated strike price per share.

What happens at expiration when my stock is above the strike price?

If your stock doesn’t fall below your strike price by expiration, it’s considered to be out of the money. If it’s not sold back to the market, it will simply expire and you’ll lose the entire amount that you paid for the contract, but nothing more.

Straddles and Strangles

Why Create a Straddle or Strangle 

Straddles and strangles are great strategies if you expect a stock to move drastically up or down within a certain time period. With both of these strategies, you’re buying a call and buying a put at the same time.  

Reminder: Buying Calls and Puts

Buying a call is similar to buying the stock. You want the price of the stock to go up, making your option worth more, so you can profit.

Buying a put is similar to shorting a stock. When buying a put, you want the price of the stock to go down, which will make your option worth more, so you can make a profit.

How are they different?

With a straddle, you’re buying a call and buying a put with the same strike price and same expiration date. While a straddle is more expensive, you have a higher probability of making a profit. 

With a strangle, you’re buying a call and buying a put with different strike prices but with the same expiration date. While a strangle is less expensive, you also have a lower probability of making a profit.

Why would I buy a straddle or strangle?

Generally speaking, you want to buy a straddle or strangle if you believe there will be a drastic change in the price of a stock, but you don’t know if it will go up or down. If the price does move drastically enough in either direction, you’ll make a profit. 

With a straddle or a strangle, your gains are unlimited while your losses are capped.

How do I make money?

With both a straddle and a strangle, your gains are unlimited. If the stock moves drastically up or down, you’ll make a profit. 

Reminder: Making Money on Calls and Puts

For your call, you can either sell the option itself for a profit or wait until expiration to exercise it and buy 100 shares of the stock at the stated strike price per share.

For your put, you can either sell the option itself for a profit or wait until expiration to exercise it and sell 100 shares of the stock at the stated strike price per share.

Is this the right strategy?

When deciding if you should buy a straddle or strangle, you may want to consider if there are any major events coming up that may cause a drastic increase or decrease in the underlying stock’s value.

For example, is the company releasing a new, exciting product? Is there an upcoming earnings call?

What are the risks?

Your max loss is the premium you pay for both of the options. 

Once you buy a straddle or a strangle its value goes up and down with the value of the underlying stock. If the stock’s value is in between or at your strike price at expiration, the straddle or strangle will expire worthless. 

However, you’ll never lose more than the price you paid to buy the straddle or strangle.

Choosing a Straddle or Strangle

Break-Even price

The break-even price is the price a stock needs to reach before your contract expires so that you don’t lose money on your investment. For straddles and strangles, you have two break-even prices, one if the stock goes up and one if the stock goes down.

If the stock goes up

This break-even price is calculated by taking the call strike price and adding the price you paid for both the call and the put.

If the stock goes down

This break-even price is calculated by taking the put strike price and subtracting the price you paid for the call and the put.

Example

For example, let’s say you purchase a straddle with a $10 strike price for $2.00. The break-even price for the call would be $12.00, and the break-even price for the put would be $8.00.  

Strike Price

The strike price is the price at which a contract can be exercised. For a strangle, you have one strike price for your call option and one strike price for your put option. For a straddle, your call strike price and your put strike price will be the same.

Call Strike Price

The call strike price is the price that you think the stock is going to go above. The higher the stock goes above this strike price plus the premium you paid to enter the position, the more money you’ll make.

Put Strike Price

The put strike price is the price that you think the stock is going to go below. The lower the stock goes below the strike price minus the premium you paid to enter the position, the more money you’ll make.

How do I choose the right strike prices?

Straddle Strike Price

Both legs of your straddle will have the same strike price. You want the strike price to be close to the stock’s current market price, with a goal that the price of the stock will move drastically in either direction away from this price.

Strangle Strike Price

Strangles have two different strike prices, one for each contract.

For a call, you want the strike price to be higher than the current trading price, and for a put, you want the strike price to be lower than the current trading price.

The further away your lower and higher strike prices are from the stock’s current market price, the cheaper the overall strategy will be, but the lower your probability of profit will be.

Expiration Dates

Unlike stocks, options contracts expire. The expiration date sets the timeframe for when you can choose to close or exercise your contracts.

How do I choose an expiration date?

The further away the expiration date is, the more money you’ll pay for the contract, but the more time the stock has to reach your break-even price.

Monitoring a Straddle or Strangle

How does buying a straddle or strangle affect my portfolio value?

Buying a straddle or a strangle is a lot like buying a stock. You can sell it for a profit or loss depending on what’s happening in the market. Either way, it’ll be part of your total portfolio value.

Where can I monitor it?

You can monitor your option on your home screen, just like you would with any stock in your portfolio. You can find information about your returns and average cost by tapping the position.

Can I close my straddle or strangle before expiration?

Yes! To close your position from your app:

  1. Tap the option on your home screen.
  2. Tap Trade.
  3. Tap Close.

Why would I close?

The main reason people close their straddle or strangle is to lock in profits or avoid potential losses.

Can I exercise my straddle or strangle before expiration?

Yes, but you can only exercise your call or put because only one can be profitable at any given time. In order to do so, please reach out to our support team!

Above the High

If your stock is above the call’s strike price at expiration, we’ll automatically exercise or sell the contract for you, depending on if you have enough money to buy 100 shares of the underlying stock. You don’t need to worry about checking the app.

In Between the Call and Put

Depending on the price of the underlying stock your contracts make be exercised, sold, or expire worthless. If both of your options expire worthless, you’ll lose the maximum amount.

For a straddle, you’ll only lose the maximum amount if the stock expires at your exact strike price. Remember, in a straddle, your strike prices are the same.

Below the Low

If your stock is below the put’s strike price at expiration, we’ll automatically exercise or sell the contract for you, depending on if you have 100 shares to sell. You don’t need to worry about checking the app.

Call Credit Spreads

Why Create a Call Credit Spread

A call credit spread is a great strategy if you think a stock will stay the same or go down within a certain time period. When you enter a call credit spread, you’re selling a call and buying a call. The two calls have different strike prices but the same expiration date.

When entering a call credit spread, you’ll always receive a premium from someone who wants the right to buy the underlying stock from you at the lower strike price.

How are the two calls different?

Selling a call is how you make a profit, and buying a call is meant to mitigate your losses if the stock suddenly goes up and you get assigned.

Reminder

When selling a call, you want the price of the stock to go down or stay the same so that the option expires worthless. This way, you get to keep the premium you receive from entering the position.

Buying a call is similar to buying stock. When buying a call, you want the price of the stock to go up, which will make your option worth more, so you can profit.

Why would I enter a call credit spread?

Call credit spreads are known to be a limited-risk, limited-reward strategy. This is because you’re capped at how much you can make or lose.  

When you enter a call credit spread, the call you’re selling has a lower strike price than the call you’re buying.

Buying the call option with a higher strike price lets you offset the risk of selling the call option with the lower strike price.

How do I make money?

With a call credit spread, the maximum amount you can profit is by keeping the money you received when entering the position.

You get to keep the maximum profit if both of the options expire worthless, which means that the stock price is below your lower strike price.

What are the risks?

Your potential for profit starts to go down once the underlying stock goes above your lower strike price. Once the underlying stock reaches or goes above your higher strike price, you’ll lose the maximum amount.

Your maximum loss is the difference between the two strike prices minus the premium received to enter the call credit spread.  

Choosing a Call Credit Spread

Break-Even Price

When you enter a call credit spread, you receive the maximum profit in the form of a premium. The stock needs to stay below your break even price so that you don’t lose money on your investment.

Once it goes above your break even price, you’ll start to lose money up until you reach the maximum loss.

Your break-even price is your lower strike price plus the premium you received when entering the position.

Strike Price

The strike price is the price at which a contract can be exercised. For a call credit spread, you have two different strike prices for each of your call options.

Low Strike Price

The lower strike price is the price that you think the stock will stay below. If the stock stays below this price, you’ll make the maximum profit.

High Strike Price

Once the stock reaches or goes past the higher strike price, you’ll lose the maximum amount.

How do I choose the right strike prices?

Low Strike Price

The lower this strike price is, the more likely the stock price is to be above it at expiration, but the more you’ll receive as a premium.

High Strike Price

The closer this strike price is to the lower strike price, the cheaper the overall strategy will be, but it will also limit your maximum loss.

Expiration Dates

Unlike stocks, options contracts expire. It sets the timeframe for when you can choose to close your position.

How do I choose an expiration date?

The further away the expiration date is, the more money you’ll get for entering the strategy, but the more time the stock has to reach your break even price.

Monitoring a Call Credit Spread

How does entering a call credit spread affect my portfolio value?

When you enter a call credit spread, your account is immediately credited the cash for the sale and this will be reflected in your portfolio value.

Since this is a credit strategy, you make money when the spread’s value goes down. Therefore, your portfolio will go up as the spread’s value goes down, and your portfolio will go down when the spread’s value goes up.

Where can I monitor it?

You can monitor your options on your home screen, just like you would with any stock in your portfolio. You can find information about your returns and average cost by tapping the position.

Can I close my call credit spread before expiration?

Yes! To close your position from your app:

  1. Tap the option on your home screen
  2. Tap Trade
  3. Tap Close

Why would I close my position?

The main reason people close their call credit spread is to lock in profits or avoid potential losses.

If there are only a few more dollars that you can make, it may make sense to close your position to guarantee a profit.

Can I exercise my call credit spread before expiration?

No. You don’t really have control in this strategy because it’s a net credit strategy which means that you’re selling options.

Can I get assigned before my contract expires?

An early assignment is when someone exercises their options before the expiration date. This is rare but could lead to you selling 100 shares of the stock. However, you have the other call option so you can buy those 100 shares at that contract’s strike price.

What happens at expiration when the stock goes...

Below the Low

If this is the case, you’ll keep the maximum profit. We’ll automatically let both options expire worthless, so you don’t need to worry about checking the app.

In Between the Two

If this is the case, we'll automatically close your position. Depending on whether you’re above or below your break even price you can still lose or make money.  

Above the High

If both calls are above the market price of the stock, it’s very likely that you’ll get assigned on the contract with the lower strike price. If this is the case, we’ll automatically exercise the contract with the higher strike price, and you’ll lose the maximum amount.

Keep in mind, if the stock price is close to either of your strike prices we’ll treat it as if it’s between your two strike prices.

Put Credit Spreads

Why Create a Put Credit Spread

A put credit spread is a great strategy if you think a stock will stay the same or go up within a certain time period. When you enter a put credit spread, you’re selling a put and buying a put. The two puts have different strike prices but the same expiration date.

When entering a put credit spread, you’ll always receive a premium from someone who wants the right to sell the underlying stock to you at the higher strike price.

How are the two puts different?

Selling a put is how you make a profit, and buying a put is meant to mitigate your losses if the stock suddenly goes down and you get assigned.

Reminder: Selling a Put

When you’re selling a put, you want the price to go up or stay the same so your option expires worthless and you get to keep the money you received when you entered the position.  

Buying a put is similar to shorting a stock. When buying a put, you want the price of the stock to go down, which will make your option worth more, so you can make a profit.

Why would I enter a put credit spread?

Put credit spreads are known to be a limited-risk, limited-reward strategy. This is because you’re capped at how much you can make or lose.

When you enter a put credit spread, you’re agreeing to buy the underlying stock at a price that’s higher than its current market value, and also buying the right to sell the stock at a price that’s lower.

Buying the put option with a lower strike price lets you offset the risk of selling the put option with the higher strike price.

How do I make money?

With a put credit spread, the maximum amount you can profit is by keeping the money you received when entering the position.

You get to keep the maximum profit if both of the options expire worthless, which means that the stock price is above your higher strike price.

What are the risks?

Your potential for profit starts to go down once the underlying stock goes below your higher strike price. Once the underlying stock reaches or goes below your lower strike price, you’ll lose the maximum amount.

Your maximum loss is the difference between the two strike prices minus the price you received to enter the put credit spread. 

Choosing a Put Credit Spread

Break-Even Price

When you enter a put credit spread, you receive the maximum profit in the form of a premium. The stock needs to stay above your break even price so that you don’t lose money on your investment.

Once it falls below your break even price, you’ll start to lose money up until you reach the maximum loss.

Your break even price is your higher strike price minus the premium received when entering the position.

Strike Price

The strike price is the price at which a contract can be exercised. With a put credit spread, you’ll have one strike price for each of your put options.

High Strike Price

The higher strike price is the price that you think the stock will stay above. If the stock stays above this price, you’ll make the maximum profit.

Low Strike Price

Once the stock reaches or goes past this point, you’ll lose the maximum amount.

How do I choose the right strike prices?

High Strike Price

The higher this strike price is, the more you’ll receive as a premium but the more likely the stock price is to be below it at expiration.

Low Strike Price

The closer this strike price is to the higher strike price, the more expensive the overall strategy will be, but it will also limit your maximum gain.

Expiration Dates

Unlike stocks, options contracts expire. It sets the timeframe for when you can choose to close your position.

How do I choose an expiration date?

The further away the expiration date is, the more money you’ll get for entering the strategy, but the more time the stock has to reach your break even price.

Monitoring a Put Credit Spread

How does entering a put credit spread affect my portfolio value?

When you enter a put credit spread, your account is immediately credited the cash for the sale and this will be reflected in your portfolio value.  

Since this is a credit strategy, you make money when the spread’s value goes down. Therefore, your portfolio will go up as the spread’s value goes down, and your portfolio will go down when the spread’s value goes up.

Where can I monitor it?

You can monitor your options on your home screen, just like you would with any stocks in your portfolio. You can find information about your returns and average cost by tapping the position.

Can I close my put credit spread before expiration?

Yes! To close your position from your app:

  1. Tap the option on your home screen.
  2. Tap Trade.
  3. Tap Close.

Why would I close?

The main reason people close their put credit spread is to lock in profits or avoid potential losses.

If there are only a few more dollars that you can make, it may make sense to close your position to guarantee a profit.

Can I exercise my put credit spread before expiration?

No. You don’t really have control in this strategy because it’s a net credit strategy which means that you’re selling options.

Can I get assigned before my contract expires?

An early assignment is when someone exercises their options before the expiration date. This is rare but could lead to you buying 100 shares of the stock. However, you have the other put option so you can sell those 100 shares at that contract’s strike price.

What happens at expiration when the stock goes...

Above the High

If this is the case, you’ll keep the maximum profit. We’ll automatically let both options expire worthless, so you don’t need to worry about checking the app.

In Between the Two

If this is the case, we'll automatically close your position. Depending on whether you’re above or below your break even price, you can still make or lose money.  

Below the Low

If both puts are above the market price of the stock, it’s very likely that you’ll get assigned on the contract with the higher strike price. If this is the case, we’ll automatically exercise the contract with the lower strike price, and you’ll lose the maximum amount.

Keep in mind, if the stock price is close to either of your strike prices, we’ll treat it as if it’s between your two strike prices.

Call Debit Spreads

Why Create a Call Debit Spread

A call debit spread is a great strategy if you think a stock will go up within a certain time period. When you enter a call debit spread, you’re buying a call and selling a call. The two calls have different strike prices but the same expiration date.

When entering a call debit spread, you’ll always pay a premium to someone who is giving you the right to buy the underlying stock at the lower strike price, and you also receive a premium for agreeing to sell the underlying stock if you get assigned.

How are the calls different?

The call with the lower strike price is what you’re hoping to profit off of, and the call with the higher strike price is what helps mitigate potential losses.

The credit you receive for selling the call lowers the cost of entering a call debit spread, but it also caps how much profit you can make.

Reminder

Buying a call is similar to buying stock. When buying a call, you want the price of the stock to go up, which will make your option worth more, so you can profit.

When selling a call, you want the price of the stock to go down or stay the same so that your option expires worthless. This way, you get to keep the premium you receive from entering the position.

Why would I buy a call debit spread?

Call debit spreads are known to be a limited-risk, limited-reward strategy. This is because you’re capped at how much you can make or lose.

When you enter a call debit spread, you’re buying the right to buy stocks at a fixed price, and you’re also agreeing to sell them for an even higher fixed price if necessary.  

Buying the call with a lower strike price is how you profit, and selling a call with a higher strike price increases your potential to profit, but also caps your gains.

How do I make money?

With a call debit spread, the maximum you can profit is the difference between the two strike prices, minus the premium you paid to enter the position.

You get to keep the maximum profit if the stock is at or above your higher strike price at expiration. If the stock passes your higher strike price, you’ll still only make the maximum amount.

What are the risks?

You’ll never lose more than the premium you paid to enter the call debit spread. If the underlying stock is at or below your lower strike price at expiration, you’ll lose the maximum amount—the debit paid when you entered the position.  

If this is the case, both options will expire worthless.

Choosing a Call Debit Spread

Break-Even price

The break even price is the price a stock needs to reach when your contract expires so that you don’t lose or make money on your investment.

Your break even price is the lower strike price plus the amount you paid to enter the call debit spread.

Strike Price

The strike price is the price at which a contract can be exercised. With a call debit spread, you’ll have one strike price for each of your call options.

Low Strike Price

The lower strike price is the price that you think the stock is going to go above. The more the stock rises above that strike price, the more money you’ll make until you reach your maximum profit.

High Strike Price

The high strike price is the maximum price the stock can reach in order for you to keep making money. Once the stock rises past this price, you’ll no longer profit.

How do I choose the right strike prices?

Low Strike Price

The lower this strike price is, the more likely the stock price is to be above it at expiration, but the more you’ll pay as a premium.

High Strike Price

The closer the higher strike price is to the lower strike price, the cheaper the overall strategy will be, but it will also limit your potential gain.

Expiration Date

Unlike stocks, options contracts expire. The expiration date sets the timeframe for when you can choose to close or exercise your contracts.

How do I choose an expiration date?

The further away the expiration date is, the more money you’ll pay for the call debit spread, but the more time the stock has to reach your break even price.

Monitoring a Call Debit Spread

How does a call debit spread affect my portfolio value?

After buying, your portfolio value will include your call debit spread, and its price will change similar to the way a stock’s price changes, meaning its value can go up or down.

Where can I monitor it?

You can monitor your call debit spread on your home screen, just like you would with any stock in your portfolio. You can find information about your returns and average cost by tapping the position.

Can I close my call debit spread before expiration?

Yes! To close your position from your app:

  1. Tap the option on your home screen.
  2. Tap Trade.
  3. Tap Close.

Why would I close?

The main reason people close their call debit spread is to lock in profits or avoid potential losses.

If there are only a few more dollars that you can make, it may make sense to close your position and guarantee a profit.

Can I exercise my call option spread before expiration?

Not really. With a call debit spread, you only control one leg of your strategy. While unusual, you can technically exercise the option with the lower strike price and purchase 100 shares of the underlying stock.  

Can I get assigned?

Technically, yes, but you don’t need to worry about this. If you get assigned, it guarantees your maximum profit.  

What happens at expiration when the stock price goes:

Above the High

If this is the case, you’ll keep the maximum profit. We’ll automatically exercise your contract with the lower strike price.

In Between the Two

If this is the case, we'll automatically close your position. Depending on whether you’re above or below your break even price, you can still make or lose money.  

Below the Low

We’ll let both of your options expire worthless, and you’ll lose the maximum amount.

Keep in mind, if the stock price is close to either of your strike prices, we’ll treat it as if it’s between your two strike prices.

Put Debit Spreads

Why Create a Put Debit Spread

A put debit spread is a great strategy if you think a stock will go down within a certain time period. When you enter a put debit spread, you’re buying a put and a selling put. The two puts have different strike prices but the same expiration date.

When entering a put debit spread, you’ll always pay a premium to someone who is giving you the right to sell the underlying stock at the higher strike price, and you also receive a premium for agreeing to buy the underlying stock if you get assigned.

Overall, entering a put debit spread costs you money.

How are the puts different?

The put with the higher strike price is what you’re hoping to profit off of, and the put with the lower strike price is what helps mitigate your losses.

The credit you receive for selling the put lowers the cost of entering a put debit spread, but it also caps how much profit you can make.

Reminder

Buying a put is similar to shorting a stock. When buying a put, you want the price of the stock to go down, which will make your option worth more, so you can make a profit.

When you’re selling a put, you want the price to go up or stay the same so your option expires worthless and you get to keep the money you received when you entered the position.  

Why would I buy a put debit spread?

Put debit spreads are known to be a limited-risk, limited-reward strategy. This is because you’re capped at how much you can make or lose.

When you enter a put debit spread, you’re buying the right to sell stocks at a fixed price, and you’re also agreeing to buy them for an even lower fixed price if necessary.  

Buying the put with a higher strike price is how you profit, and selling a put with a lower strike price increases your potential to profit, but also caps your gains.

How do I make money?

With a put debit spread, the maximum you can profit is the difference between the two strike prices, minus the premium you paid to enter the position.

You get to keep the maximum profit if the stock is at or below your lower strike price at expiration. If the stock is below your lower strike price, you’ll still only make the maximum amount.

What are the risks?

You’ll never lose more than the premium you paid to enter the put debit spread. If the underlying stock is at or above your higher strike price at expiration you’ll lose the maximum amount, the debit paid when you entered the position.  

If this is the case, both put options will expire worthless.

Choosing a Put Debit Spread

Break-Even Price

The break even price is the price a stock needs to reach when your contract expires so that you don’t lose or make money on your investment.

Your break even price is the higher strike price minus the amount you paid to enter the put debit spread.

Strike Price

The strike price is the price at which a contract can be exercised. With a put debit spread, you’ll have one strike price for each of your put options.

High Strike Price

The higher strike price is the price that you think the stock is going to go below. The more the stock falls below this strike price, the more money you’ll make until you reach your maximum profit.

Low Strike Price

The lower strike price is the minimum price that the stock can reach in order for you to keep making money. Once the stock falls past this price, you’ll no longer profit.

How do I choose the right strike prices?

High Strike Price

The higher this strike price is, the more likely the stock price is to be below it at expiration, but the more you’ll pay as a premium.

Low Strike Price

The closer the low strike price is to the higher strike price, the cheaper the overall strategy will be, but it will also limit your potential gain.  

Expiration Date

Unlike stocks, options contracts expire. The expiration date sets the timeframe for when you can choose to close or exercise your contracts.

How do I choose an expiration date?

The further away the expiration date is, the more money you’ll pay for the put debit spread, but the more time the stock has to surpass your break even price so you can make a profit.

Monitoring a Put Debit Spread

How does a put debit spread affect my portfolio value?

After buying, your portfolio value will include your put debit spread, and its price will change similar to the way a stock’s price changes, meaning its value can go up or down.

Where can I monitor it?

You can monitor your put debit spread on your home screen, just like you would with any stocks in your portfolio. You can find information about your returns and average cost by tapping the position.

Can I close my put debit spread before expiration?

Yes! To close your position from your app:

  1. Tap the option on your home screen.
  2. Tap Trade.
  3. Tap Close.

Why would I close?

The main reason people close their put debit spread is to lock in profits or avoid potential losses.

If there are only a few more dollars that you can make, it may make sense to close your position and guarantee a profit.

Can I exercise my put debit spread before expiration?

Not really. With a put debit spread, you only control one leg of your strategy. While unusual, you can technically exercise the option with the higher strike price, and sell 100 shares of the underlying stock.  

Can I get assigned?

Technically yes, but you don’t need to worry about this. If you get assigned it guarantees your maximum profit.  

What happens at expiration when the stock goes...

Below the Low

If this is the case, you’ll keep the maximum profit. We’ll automatically exercise your contract with the higher strike price and you’ll likely get assigned on your lower option.

In Between the Two

If this is the case, we'll automatically close your position. Depending on whether you’re above or below your break even price, you can still make or lose money.  

Above the High

We’ll let both of your options expire worthless and you’ll lose the maximum amount.

Keep in mind, if the stock price is close to either of your strike prices, we’ll treat it as if it’s between your two strike prices.

Iron Condors

Why Create an Iron Condor

An iron condor is a great strategy if you expect a stock’s price to stay within a certain range. With an iron condor, you’re entering both an above market price call credit spread and a below market price put credit spread.

How are the spreads different?

With a call credit spread, you’re hoping the underlying stock stays below the lower strike price, so you make a profit.

With a put credit spread, you’re hoping the underlying stock stays above the higher strike price, so you make a profit.

Reminder

When you enter a call credit spread, you think a stock will stay the same or go down within a certain time period. You want the strategy to expire worthless so you can keep the money you received when entering the position.

When you enter a put credit spread, you think a stock will stay the same or go up within a certain time period. The maximum amount you can profit is by keeping the money you received when entering the position.

Why would I enter an iron condor?

Iron condors are known to be a limited-risk, non-directional strategy. This is because you’re capped at how much you can make or lose.

You’d enter an iron condor when you expect the underlying stock’s price to stay relatively the same.  

How do I make money?

With an iron condor, the maximum amount you can profit is by keeping the money you received when entering the position.

You get to keep the maximum profit if the iron condor expires when the stock’s price is between the higher put and the lower call strike prices.

What are the risks?

Your potential for profit starts to go down once the underlying stock goes too far up or down.

Once the underlying stock goes above the highest strike price or below the lowest strike price you’ll lose the maximum amount.

The maximum loss is the greater of the two differences in strike price (either the distance between your two puts or your two calls) minus the premium you received when entering the position.

Choosing an Iron Condor

Break-Even Price

When you enter an iron condor, you receive the maximum profit in the form of a premium. The stock needs to stay in between your two break even prices so that you don’t lose money on your investment.

To make money, you want the underlying stock to:

Stay Below

The strike price of the lower call option plus the premium you received for the entire iron condor.

Stay Above

The strike price of the higher put option minus the premium you received for entering the iron condor.

Strike Price

The strike price is the fixed price that you’ll receive or pay per share if you choose to exercise your option. With an iron condor, you have four strike prices. You have two call strike prices and two put strike prices. The call strike prices will always be higher than the put strike prices.

High Strike Price

This is a call with the highest strike price. Once the stock reaches or goes past this point, you’ll lose the maximum amount.

Middle Strike Prices

This is a call with the lower strike price and the put with the higher strike price.  If the stock stays between these, you’ll make the maximum profit.

Lower Strike Price

This is a put with the lowest strike price. Once the stock reaches or falls past this point, you’ll lose the maximum amount.

How do I choose the right strike prices?

When picking your strike prices for an iron condor, there are two main things to consider:

Distance from the stock’s current market price

The closer your strike prices are to the stock’s current market price, the lower your probability is of being successful.

Distance between the calls and distance between the puts

The further apart your strike prices are, the more you’ll receive as a premium when entering the position. The bigger the difference in strike price, the more collateral you’ll need to hold, and the higher your maximum potential loss will be.

Expiration Dates

Unlike stocks, options contracts expire. It sets the timeframe for when you can choose to close your position.

How do I choose an expiration date?

The further away the expiration date is, the more money you’ll get for entering the strategy, but the more time the stock has to reach either of your break even prices.

Monitoring an Iron Condor

How does entering an iron condor affect my portfolio value?

When you enter an iron condor, your portfolio value will include the value of the spreads. Since this is a credit strategy, you make money when the value of the spread goes down. Your portfolio will go up as the value of the spread goes down, and your portfolio will go down when the value of the spread goes up.

Where can I monitor it?

You can monitor your iron condor on your home screen, just like you would any stocks in your portfolio. You can find information about your returns and average cost by tapping on the position. 

Can I close my iron condor before expiration?

Yes! You can close your iron condor spread in your mobile app:

  1. Tap the option on your home screen.
  2. Tap Trade.
  3. Tap Close.

Why would I close?

The main reason people close their iron condor is to lock in profits or avoid potential losses.

If there are only a few more dollars that you can make, it may make sense to close your position to guarantee a profit.

Can I exercise my iron condor before expiration?

No. You don’t really have control in this strategy because it’s a net credit strategy which means that you’re profitable if you don’t get assigned on the option that you’re selling, and it expires worthless.

Can I get assigned before my contract expires?

An early assignment will typically only happen if the stock moves drastically in either direction. If you get assigned, you’ll have to buy or sell 100 shares of the underlying stock before expiration.

If you get assigned on the call, you can buy 100 shares of the underlying stock at the higher strike price or less, depending on the stock’s current market value.

If you get assigned on the put, you can sell 100 shares of the underlying stock at the lower strike price or more, depending on the stock’s current market value.

You’ll typically only get assigned on the calls or the puts because only one of them can be profitable at a time.

What happens at expiration when the stock goes:

Above the High

If both calls are in the money, it’s very likely that you’ll get assigned on the contract with the lower strike price. If this is the case, we’ll automatically exercise the contract with the higher strike price, and you’ll lose the maximum amount.

In Between the Calls

If this is the case, we'll automatically close your position. Depending on whether you’re above or below your break even price, you can still make or lose money.  

In Between the Calls and Puts

If this is the case, you’ll keep the maximum profit. We’ll automatically let all four contracts expire worthless, so you don’t need to worry about checking the app.

In Between the Puts

If this is the case, we'll automatically close your position. Depending on whether you’re above or below your break even price, you can still make or lose money.  

Below the Low

If both puts are in the money, it’s very likely that you’ll get assigned on the contract with the higher strike price. If this is the case, we’ll automatically exercise the contract with the lower strike price, and you’ll lose the maximum amount.

Keep In Mind

If the stock price is close to any of your strike prices, we’ll automatically close your position.

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