The 4 Basic Options Investments | Personal Finance

On the flip side, when you sell a put option on stocks, you get paid to take on the obligation to buy shares of that company’s stock at a certain price on or before a certain date. This is generally considered a bullish strategy, as you profit if the company’s share price remains stable or increases before expiration. On that front, if the stock closes at or above the strike price at expiration, you can book 100% of the premium you received (less commissions and fees) as profit.

You do lose money on the position if the stock’s price falls, but unlike a short call position, your potential loss is considered limited, since share prices don’t generally drop below $0. The chart below shows your profit at expiration for a short put position. It assumes a single contract on 100 shares with a $3 per share premium and a $50 strike price.

Although the four basic options investments you can make are fairly straightforward, they can be combined to create far more advanced positions. Those combinations are what many options investors use when managing their investments, as multilegged positions can help either manage or amplify the risk/reward profile.

Still, options are leveraged investments where you may have the potential to lose more than 100% of your invested capital if things don’t go your way. That makes it crucially important to manage the size of your options risk when compared to your overall asset allocation plan. That way, if your options investments don’t go the way you hope, your overall plan can remain on track, while if they do turn out in your favor, they can be the icing on your cake.