Besides buying the simple call or put, there are many other strategies one can use when trading in options. I will be providing some definitions below that are used by a popular online trading company as well as showing some screen shots of the different types of quotes. There are different reasons for taking on a certain position and we will address those over the next few days.

Everything you see here is my opinion. I have expounded on the definitions provided the online company. Some companies that provide online trading services include TD Ameritrade, E*TRADE, Scottrade, Fidelity, and Schwab. There are others but these are the most well-known.

Covered Call: This is a safer way to become familiar with options. This is a strategy where an option is written against current stock holdings. For example, if you had 400 shares of MSFT, you would Write (Sell) 4 MSFT July $30 options where July is the Expiration Month and $30 is the Strike Price. In this case, current stock price of MSFT is $27.55. One would use this strategy to hedge one’s position. If the stock closes over $30, the contract will most likely be exercised by the buyer. As the Writer/Seller of the contract, you would deliver the stock to the Buyer and he would pay you $30 per share. If the option expired and the stock price were less than $30 per share, the Writer/Seller of the contract would be able to keep the premium, thus reducing the cost basis of the stock. One would use this strategy if you expect the stock to trade within a trading range not to exceed the strike price. This transaction can also be known as a Buy-Write Strategy.

Covered Put: This is similar to the Covered Call but reverse and generally requires higher Options Access. Here, you would Write/Sell a put option and you would also be Short the underlying security. Let’s use our MSFT example. If you short MSFT at $27.55 and Wrote/Sold put options at $25.00, you would profit as the stock price declines. But, since you sold a put option, if the stock price dropped lower than $25, the buy of the option would exercise and you would have to buy the stock at $25. But you still have the profit from your original short of the position. One would use this strategy expecting the stock price to decrease, but not go lower than the strike price. This transaction can also be known as a Sell-Write strategy.