Every financial option is a contract between the two counterparties with the terms of the option specified earlier in a terms sheet. By adding options to your trading strategies you can cover any position and use their flexibility in your favor. There are several options trading strategies to realize in oder to cover a stock portfolio.

The protector put.

The protector put is an operation of covering a portfolio by buying puts.

When you want to cover your stock portfolio, the operation of protector put allows to assure the selling price at strike.

Buying  put options grants the right to sell the stocks at the cost of exercise in exchange for paying a premium.

A trader who believes that a stock’s price will decrease can buy the right to sell the stock at a fixed price. He will be under no obligation to sell the stock, but has the right to do so until the expiration date.

On the expiration date, if the quotation is over the price of exercise (strike) it will not be of interest to exercise the option and there will lost the full premium that will be less a benefit in case of selling the actions or, in another case, of more cost of the actions if these do not sell for the fact of having realized the coverage in this period.

If the quotation is below the price of exercise in the moment of the expiration on having exercised the option at the cost of exercise there is achieved the target to sell as it had foreseen, although also it is necessary the option of before to the expiration, sell the option and to support the stocks with ends of realizing the selling in a later moment if he entrusts himself in a recovery of the price.

Options Trading

Options are contracts between two parties that give the buyer the “option” or the right to buy or sell a particular asset on or before the exercise date at an agreed upon price which is called the strike price.  The seller of an option has a contractual obligation to the buyer and in return collects a premium from the buyer.

A buyer can either purchase a call option or a put option.  A call option gives the buyer of the option the right to purchase the underlying asset at the agreed upon price where as a put option gives the buyer the right to sell the underlying asset at the agreed upon price.  If the buyer chooses to exercise the option the seller must buy or sell the underlying asset at the agreed upon price.

An option contract can be written on any property.  Commonly traded options contracts are written on stocks, bonds, commodities or derivative instruments.  An option contract at minimum must contain the following information:

- Whether the holder has the right to buy or sell the underlying asset

- The agreed upon price, or “strike price”

- The expiration date of the contract which tells both parties the last day that the buyer can exercise the option

-The settlement terms.  This is important because the seller must either deliver the underlying asset or the equivalent cash value

-The premium the buyer is paying to the seller

Option contract prices in the market are determined by various quantitative methods including the black scholes, binomial tree pricing, Monte Carlo models & finite difference models.

Investors interested in purchasing options contracts may purchase a standardized contract on one of the options/futures exchanges, prices can be looked up by their ticker (symbol).

Investors utilize many options strategies such as a butterfly spread, Iron condor, straddle, strangle and covered call.  The most commonly used strategy is a covered call option.

A covered call is when the seller of the call option holds the stock that the option contract covers.  If the price of the stock rises above the exercise price the buyer of the covered call will exercise the option, the profit the seller receives will be the call premium.  If the stock price falls below the exercise price the seller will loose some money due to holding the stock, this loss however will be partially made up by recieving the option premium.