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How to Trade Bonds

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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While the bond market is trillions of dollars larger than the stock market, it often receives much less press. But there are plenty of traders in the market trying to build their fortunes by trading bonds. Here, we cover the basics of how to trade bonds and explain some of the most commonly used bond trading strategies for the fixed-income markets.

What is bond trading?

Bond trading is the exchange of bonds among investors. By issuing a bond, a company promises investors to make interest payments of a certain amount for a specified time period. The art of bond trading lies in finding bonds that are going to increase in value.

What makes a bond’s value increase? There are at least two major things that do:

  • Declining interest rates: This issue affects all bonds, though to varying degrees depending on factors like the bond’s maturity. When interest rates decline, the prices of bonds that have already been issued rise, and vice versa. That’s because old bonds are paying more than new bonds, so old bonds tend to rise in value. But it’s the reverse when rates rise, with old bonds falling in value as new ones pay more. The important point is this: Interest rates and bond prices move in opposite directions.
  • A perception that the issuing company is less risky: All else equal, lower risk equals a rise in a bond’s price. That’s another way of saying that investors demand to be compensated with a higher return if they take on more risk. Risk can be lowered in many ways, such as improvements in the company’s business, the company debt payoffs, a general rise in the economy that is healthy for business growth — and the list goes on. In short, anything that makes the business less risky will tend to raise a bond’s price — so bond traders are looking to capitalize on these factors and others to find bonds that will reliably generate income and rise in price, resulting in a capital gain.

Getting started: How to buy and sell bonds

If you want to get started trading bonds, you’ll need a brokerage account. Bonds can be purchased through a specialized bond broker, though most online brokerages allow you to purchase them too. If you’re buying newly issued U.S. government bonds, you can buy them directly from the Treasury after setting up an account with TreasuryDirect.

Many organizations issue bonds, but some of the most popular types being traded on U.S. exchanges include the following:

  • The U.S. federal government: This is the largest single issuer of bonds in the U.S.
  • Corporations: These include companies large and small, domestic and foreign.
  • Municipalities: These bonds are called “munis” and are issued by cities and counties.
  • Foreign governments: These bonds are issued by foreign countries.

Between all the companies and governments — each with their own maturities and interest rates — that’s a lot of choice for an investor. In addition, it often takes at least $1,000 to buy a single bond, making it prohibitive for less well-heeled investors to get started and quickly build a diversified portfolio.

These concerns have led investors to increasingly turn to mutual funds and exchange-traded funds (ETFs) as a way to buy bonds. Funds trade with lower price tags while offering immediate diversification across a range of issuers. Plus, rather than analyze each bond individually, investors can easily and quickly select the kinds of bonds they want — whether they’re looking for funds with varying durations, a minimum credit quality of the issuer or other features.

Trading commissions often run about $1 per bond, though volumes over $10,000 may earn you a significant discount at some brokerages. Brokerages may sometimes roll up their costs in the bond price they quote you, making it less obvious what they charge. While some brokers have $1 minimum commissions, others have $10 minimums, so if you’re buying just one bond — already $1,000, typically — you could pay up to 10 times more in trading fees what you otherwise might. If you’re making a small purchase, make sure you choose the right broker for the job.

Trading commissions tend to be cheaper on municipal and federal government bonds, and some brokers will even allow you to buy U.S. Treasury securities commission-free.

Understanding a bond quote

When you buy or sell an individual bond, your broker will provide you with a lot of information about the bond. To make a smart trade, it’s important to understand what this info means:

  • Price: This is the last traded price of the bond, often expressed as a percentage of the bond’s par value (defined as the price at which the bond was issued).
  • Coupon: This is the bond’s payment, expressed in dollars (or the relevant currency).
  • Yield: The yield is the coupon divided by the bond’s price.
  • Yield to maturity: This is the yield assuming you hold the bond to maturity.
  • Callable: This says whether the company can call the bond or force it to be redeemed.
  • Duration or maturity: Essentially, this represents how long until the bond matures.
  • Issuer: The company that issued the bond is known as the issuer.
  • Bond rating: This is how the major ratings agencies rate the bond.

It’s vital to remember that a bond’s price and yield are inversely correlated. A bond’s coupon is typically fixed (though there are bonds that pay variable rates), so as a bond’s price rises, its yield falls. Investors receive the same coupon but are paying a higher price for that payout.

For example, let’s say a bond with a par value of $1,000 pays a 5% coupon. Bondholders earn $50 annually for each bond they own. As the bond price rises to $1,250 (perhaps due to lower interest rates), its yield falls. That same bond still pays the $50 coupon, but now the bond has a yield of 4%, or $50 divided by $1,250. The bondholder can sell the bond and realize the gain or hold and receive the coupon. In any case, the bond will eventually return to par value at maturity.

Conversely, if the bond falls below its par value, its yield will rise. For example, if the bond price fell to $833 (perhaps due to rising interest rates), the bond would still pay the coupon of $50. However, its yield would rise to 6%, or $50 divided by $833. The bondholder can sell the bond and realize the loss or hold and receive the coupon. The bond will return to par value at maturity.

However, it’s important to remember that if you buy the bond at par value and hold until maturity, you will receive the coupon indicated on the bond (assuming the issuer doesn’t go bankrupt). At maturity, you’ll also receive the par value of the bond, regardless of what you paid for it.

5 popular bond trading strategies

There are a number of strategies for trading bonds, ranging from relatively passive to active trading. Here are five of the most popular trading strategies.

1. Buy and hold

This strategy is as passive as it gets, with an investor buying a bond and holding it to maturity. It minimizes costs and is good for maximizing the income generated from bonds (as opposed to the capital gains), so it’s a good strategy if you need income but don’t need to sell the bond. However, your bonds will decline in value if interest rates rise, and it’s probably better not to sell at that time.

2. Bond laddering

Slightly more active than a buy-and-hold strategy, laddering involves owning bonds with various maturities. For example, an investor may have bonds maturing in one, three, five and seven years. When the one-year bonds mature, the investor extends the ladder, buying long-term bonds with the old bond’s proceeds. This strategy is also low-cost while smoothing swings in interest rates and providing an income stream. It can be a good strategy for investors because it diversifies interest rate risk.

3. Barbelling

This more active strategy involves buying mainly short- and long-term bonds and very few medium-term ones, so the portfolio looks like a barbell. Because of all the short bonds, you’ll have to constantly reinvest. The advantage of this strategy is that you get higher yields from the long bonds and flexibility from the short bonds. However, while the short bonds don’t have much interest rate risk, the long bonds do, and they will suffer when rates rise. This strategy tends to work well when rates are relatively stable.

4. Swapping

This active strategy is like tax loss harvesting for bonds. When swapping, you sell a losing bond, get a tax write-off for the loss and reinvest in another (hopefully better) bond. This strategy can be good when you have a bond that’s not likely to recover soon, along with other gains that you might like to offset. You can also use this move as an opportunity to buy a better or higher-yielding bond — improving your overall portfolio.

5. Active trading

With active trading, an investor may use one or several strategies, often with a goal of high capital gains. Traders search for discounted (and sometimes distressed) bonds that will appreciate before maturity. Investors may analyze the credit quality of the individual business or macroeconomic factors to find bonds that are likely to increase in value. This strategy requires more advanced skills and active involvement — it’s not advisable for armchair investors, but it can work well in stable or normal markets.

Are bonds right for your portfolio?

Bonds offer some necessary diversification to your portfolio, especially if it’s already heavy in stocks. When stocks underperform, bonds move in the opposite direction and tend to offset those stocks losses.

Bonds also reduce the overall risk in your portfolio by providing some stability in comparison to the volatility of the stock market. However, younger investors should typically stray away from loading up on bonds: They have the flexibility to take on more risky investments with decades to go before retirement, allowing their portfolios to ride out the ups and downs in the market.

Finally, bonds provide a source of investment income — and who doesn’t love an occasional payout? Bond trading doesn’t get the same amount of press that stock investing receives, but it can still be lucrative without the potential losses associated with riskier stocks. Bond investing has become even easier with ETFs, especially if you’re a beginning investor and have less money available.

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What Is a Reverse Stock Split, and What Does It Mean for Your Portfolio?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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Many are familiar with stock splits, where investors receive new shares of a company’s stock in proportion to their existing holdings, but less well-known are reverse stocks splits. Like a stock split (also called a forward stock split), a reverse stock split distributes new shares of stock to investors — but instead it effectively merges existing shares to reduce the number of shares that are publicly traded.

Here’s what a reverse stock split means for your stock, including why it can sometimes be a good thing.

What is a reverse stock split and how does it work?

In a reverse stock split, a company issues one new share in exchange for multiple shares of the old stock. For example, in a 1:4 reverse split, the company would provide one new share for every four old shares.

So if you owned 100 shares of a $10 stock and the company announced a 1:4 reverse split, you would own 25 shares trading at $40 per share. The total value of your position remains the same, with the number of shares and the stock price being adjusted by the split factor.

What’s the difference between a forward vs. a reverse stock split?

In a forward stock split, the company distributes new shares at some specified ratio. For example, in a 3:1 stock split, investors receive three new shares for every old share. Simultaneously, the stock price is divided by the split factor so that the company’s market capitalization remains the same. In a 3:1 split, the former stock price would be divided by three.

In other words, you get three times as many shares, but each share is worth one-third as much as before. It’s important to note that the total value of your stock does not rise with a stock split.

So imagine you owned 100 shares of a stock trading at $120 per share. The company announces a 3:1 forward split. After the split, you would own 300 shares trading at $40 per share. Both before the split and after, the total value of your shares is $12,000.

A stock split is like slicing up a pizza. If it’s cut into four parts and you get a slice, that’s the same as a pizza cut into eight parts and getting two slices. Either way, you own one-fourth of the pie. Like the stock split, the only change is in the size of each slice — the price — and how many you get.

Reasons for a reverse stock split

While investors generally view forward stock splits favorably, the same can’t be said for reverse splits. That’s because reverse splits usually follow some kind of negative event in the company’s life that has seen the stock decline for months or years. The reverse split is often associated with bad news, although it’s not necessarily bad in and of itself.

Here are several reasons why a company might undertake a reverse stock split, including a couple of positive reasons:

  • Avoid getting delisted from the exchange: If a company’s stock falls below $1 per share for an extended period of time, the exchange may delist it. To cure this deficiency, the company can conduct a reverse split, moving the stock price above the threshold.
  • Make the company appear more legitimate: Stocks under $5 per share are considered penny stocks. Penny stocks have a bad reputation, and that’s not what most legitimate companies want to have. A reverse split can boost the stock to a “respectable” price— this may in turn lead to increased attention from analysts and investors, who may see the company as more legitimate at the higher price.
  • Allow the stock more room to fall: Executives may be anticipating the stock to fall further due to the company’s poor operating performance, and a reverse split boosts the stock price, giving it more room to fall without going into penny stock territory.
  • Adjust the price during a spinoff: Sometimes a company spins off another wholly-owned company, but this new company may have a stock price that would be too low if it weren’t adjusted higher through a reverse split. By doing a reverse split, the stock gets back into a normal trading range and can make the company look investable.
  • Lower the costs for investors: For large institutional investors, buying more shares increases transaction costs substantially. With a reverse split, a company can make it cheaper for investors to own a sizable percentage of the company.

It’s important to note that the reverse split in and of itself doesn’t fix the problems that likely led to a stock’s decline — it’s simply a stock maneuver.

Pros and cons of reverse stock splits for investors

Pros of reverse stock splits

  • Keeps the stock listed on the exchange: As a stock declines, the management team may conduct a reverse split to keep the stock listed and trading on the exchange. If the exchange is threatening to delist the stock because of a low price, a reverse split cures this problem. By raising the stock price, a reverse split allows the stock “more room” to fall before it becomes problematic again.
  • Can help relieve selling pressure: A reverse split keeps the stock above a certain threshold — often $5 or $10 per share — below which some funds may not be able to hold the stock or buy more. Thus, a reverse split would allow these investors to remain as stockholders, avoiding further selling pressure.
  • Can be a sign a company is considering the needs of its shareholders: For example, the company may want to reduce transaction costs for investors, and reducing the share count offers a way for investors to own the same percentage of the company but with fewer shares. In positive situations such as this, the stock usually hasn’t plummeted and management clearly spells out why it’s doing the reverse split. A management team that tries to consider the needs of investors is likely a good investment.

Cons of reverse stock splits

  • Can be an indicator of poor performance: When a company undertakes a reverse split, its poor operational performance is already reflected in its declining stock. The reverse split doesn’t create a declining stock; it’s an effect, not a cause, of poor performance. Still, a reverse split is often a wake-up call to investors, who should ask themselves why they still own the stock and whether they may want to consider selling it.
  • Could signal sinking stock: From a cynical perspective, a reverse split may indicate that management thinks the stock will continue to fall rather than go back up. Management may boost the price so that the company doesn’t run into immediate trouble with the exchange or its shareholders.

How do stocks perform after a reverse split?

Stocks tend to lag the market after a reverse split — that’s not surprising if a reverse split signals that management thinks the stock will continue to decline.

However, it’s worth repeating: A reverse split is an effect of poor performance, not a cause. The stock often has already been on a long downtrend, and the reverse split is just a gimmick to keep the stock on the exchange or in investors’ hands, not a real operational repair of the business.

For investors, stock splits generally should be seen as a nonevent since they don’t increase the value of an investor’s holdings. However, some research indicates that forward stock splits signal management’s confidence in a stock’s rise, while reverse stock splits signal the continued decline of the business. That being said, reverse splits rarely come out of the blue; they typically follow months, if not years, of declining stock prices.

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7 Popular Options Trading Strategies

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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Options are one of the most exciting areas of the investing world because of their potential for huge gains. But to get started, you’ll want to know what options strategies are available, when they’re best suited to particular situations and what the risks and rewards are.

Options strategies come in a variety of flavors, but they’re all based on the two fundamental options: calls and puts. From these basics, investors can create a range of strategies that maximize the payout from a stock’s movement and savvy investors pick the strategy that’s best for how they expect the stock to perform.

Options trading strategies to consider

1. The long put

The long put is an options strategy where the trader buys a put expecting the stock to be below the strike price before expiration.

Best to use when: The long put is a useful strategy when you expect the stock to decline and you want to earn a large upside. Traders will earn a significantly better return on their investment than by short selling the stock, so a long put could be a good substitute for shorting the stock directly. The long put also limits the short seller’s loss to the premium, while shorting the stock exposes the trader to uncapped losses.

Example of the long put: STK stock trades at $100 per share, and puts with a $100 strike price are available for $10 with an expiration in six months. One put costs $1,000 (one contract * 100 shares * the $10 premium).

Here’s the return at each stock price, including the cost to set up the position.

Stock price at expirationLong put’s profit

$130

-$1,000

$120

-$1,000

$110

-$1,000

$100

-$1,000

$90

$0

$80

$1,000

$70

$2,000

Risk/reward: The long put can pay off significantly if the stock moves below the strike price before the option expires. In this example, the maximum return is 10 times the original investment, or $10,000. In general, the maximum value of the long put equals the total value of stock underlying the trade (the number of contracts * 100 * the strike price).

The risk for this potential upside is a complete loss of the premium paid for the put. But if the stock moves higher, making the put less valuable, traders often can salvage some of the value by selling the put, as long as it has substantial time to expiration.

2. The long call

With the long call, the trader buys a call expecting the stock to be above the strike price before expiration.

Best to use when: The long call is much like the long put, but it pays out when the stock rises. So if you’re expecting the stock to move higher, the long call is the way to go. The long call can earn a much higher percentage return than owning the stock directly.

Because the trader’s downside is limited to the option’s premium, the long call also could be a good strategy if the stock has the potential to move much higher but has the potential to move much lower too. If the stock falls, the option’s limited loss could be less than owning the stock directly.

Example of the long call: STK stock trades at $100 per share, and calls with a $100 strike price are available for $10 with an expiration in six months. One call costs $1,000 (one contract * 100 shares * the $10 premium).

Here’s the profit at each stock price, including the cost to set up the position.

Stock price at expirationLong call’s profit

$130

$2,000

$120

$1,000

$110

$0

$100

-$1,000

$90

-$1,000

$80

-$1,000

$70

-$1,000

Risk/reward: The long call has uncapped upside as the stock moves higher, and that’s why this strategy can be a home run. If a stock rises, you can make many times your investment.

Like the long put, the risk here is that the investor could lose all of the premium paid for the call. However, if the stock moves lower — making the call less valuable — traders often can save some of the value by selling the call, as long as it has substantial time remaining to expiration.

3. The short put

In a short put, the trader sells a put expecting the stock to be higher than the strike price by expiration. This is similar to selling insurance against the stock falling below the strike price.

Best to use when: There are two good situations for the short put.

  • If the trader expects the stock to be above the strike price at expiration, the short put is a way to generate income by pocketing the premium.
  • The trader can use the short put to achieve a more attractive buy price on the underlying stock. If the stock doesn’t move below the strike price, the trader keeps the premium and can execute the strategy again. If the stock falls below the strike, the trader buys the stock at a discount to the strike price, using the premium to reduce the net price paid.

Example of the short put: STK stock trades at $100 per share, and puts with a $100 strike price are available for $10 with an expiration in six months. One put generates a total premium of $1,000 (one contract * 100 shares * $10 premium).

Here’s the profit at each price, including the cost to set up the position.

Stock price at expirationShort put’s profit

$130

$1,000

$120

$1,000

$110

$1,000

$100

$1,000

$90

$0

$80

-$1,000

$70

-$2,000

Risk/reward: The short put’s maximum payoff is the premium received by the trader. The stock might fall well below the strike price, but all the short put earns is the premium. The maximum payoff occurs anywhere above the strike price.

The downside for the short put can be substantial, and the trader can be forced to add money in order to close out the trade if there’s not enough to purchase the stock at the strike price. The maximum downside occurs when the stock goes to zero. In this example, the put would lose $10,000 (100 shares * the $100 stock * the one contract), though the investor would still have the $1,000 premium. Short puts can be risky with limited upside.

4. The covered call

In order to create a covered call, the trader sells call options for each 100 shares of the underlying stock owned. The investor expects the stock to remain relatively flat, allowing the call to expire worthless. This allows the trader to pocket the premium without having to sell the stock at the strike price.

Best to use when: The covered call can be an effective strategy for generating income when the investor owns the stock and expects it to remain relatively flat over the life of the option.

The covered call also can be an “exit strategy” for a position, with the investor selling calls for a strike price that they would be willing to receive and getting to pocket the extra premium.

Example of the covered call: STK stock trades at $100 per share, and calls with a $100 strike price are available for $10 with an expiration in six months. One call generates $1,000 in premium (one contract * $10 premium * 100 shares), and the investor sells one call for each 100 shares of the stock owned.

Here’s the return at each stock price, including the cost to set up the position.

Stock price at expirationStock’s profitCall’s profitTotal profit

$130

$3,000

-$2,000

$1,000

$120

$2,000

-$1,000

$1,000

$110

$1,000

$0

$1,000

$100

$0

$1,000

$1,000

$90

-$1,000

$1,000

$0

$80

-$2,000

$1,000

-$1,000

$70

-$3,000

$1,000

-$2,000

Risk/reward: The covered call’s maximum payoff is the premium received. This occurs right at the strike price, allowing the option seller to keep the premium without having to sell the underlying stock or losing any money on it.

There are two potential downsides for the covered call.

  • Profit that otherwise would have been made on the stock is the first downside. If the stock rises above the strike price, the investor could have realized those gains but instead loses all the stock’s upside for the duration of the covered call.
  • The trader must assume any downside risk on the stock. So if it falls, the trader can suffer there as well.

5. The married put

When using a married put, the trader buys put options on a stock for each 100 shares of the underlying stock owned. The investor suspects the stock may fall in the short term but wants to continue owning it because it may rise significantly. So the married put protects the investor’s downside.

Best to use when: There are two scenarios where the married put works well.

  • The investor expects the stock could move in either direction in the short term (because of some impending news, for instance) but wants to own it for the long term. So the put allows the investor to profit from the expected temporary fall in the stock.
  • The investor may not want to sell the stock for some other reason (such as taxes, for example), and the married put allows the investor to profit from the decline without having to sell the stock.

Example of the married put: STK stock trades at $100 per share, and puts with a $100 strike price are available for $10 with an expiration in six months. One put costs $1,000 (one contract * $10 * 100 shares), and the investor buys one put for each 100 shares of the stock owned.

Here’s the return at each stock price, including the cost to set up the position.

Stock price at expirationStock’s profitPut’s profitTotal profit

$130

$3,000

-$1,000

$2,000

$120

$2,000

-$1,000

$1,000

$110

$1,000

-$1,000

$0

$100

$0

-$1,000

-$1,000

$90

-$1,000

$0

-$1,000

$80

-$2,000

$1,000

-$1,000

$70

-$3,000

$2,000

-$1,000

Risk/reward: The married put’s maximum total profit is unlimited if the stock moves higher. The whole point of the married put is to allow the investor to gain the potential upside by paying for “insurance.” If the stock moves lower, then the put increases in value to offset that loss.

The maximum downside is the lost premium. The married put is a hedged position, and the investor expects to lose money on one end of the hedge. The trader pays the option’s premium, and if that’s the maximum loss, then it’s a good thing.

6. The long straddle

The long straddle is a strategy where the trader buys an at-the-money call and an at-the-money put with the same expiration and the same strike price. The trader suspects the stock may move significantly but is not sure in which direction.

Best to use when: The long straddle is a strategy that’s useful when you expect the stock to be volatile but it’s difficult to determine which direction it’s going. A long straddle costs a lot to set up and requires a big move in order to profit.

Example of the long straddle: STK stock trades at $100 per share. There are puts and calls with a $100 strike price available for $10 with an expiration in six months. The total cost of the trade is $2,000, consisting of the put (one contract * $10 * 100 shares) and the call (one contract * $10 * 100 shares).

Here’s the profit profile, including the cost to set up the position.

Stock price at expirationCall’s profitPut’s profitTotal profit

$130

$2,000

-$1,000

$1,000

$120

$1,000

-$1,000

$0

$110

$0

-$1,000

-$1,000

$100

-$1,000

-$1,000

-$2,000

$90

-$1,000

$0

-$1,000

$80

-$1,000

$1,000

$0

$70

-$1,000

$2,000

$1,000

Risk/reward: The long straddle can return a lot, and theoretically the return is uncapped if the stock soars. However, any profit will have to deduct the substantial cost to set up the trade, and this trade requires a stock to move big to make it profitable.

The downside of the long straddle is the complete loss of the premiums paid if the stock doesn’t move. However, if the stock moves even a little bit in either direction, the trader usually can recover some of the premium if there’s enough time until expiration on the options.

7. The long strangle

The long strangle is like the long straddle, but it’s cheaper to set up because it uses out-of-the-money options instead of at-the-money options. In the long strangle, an investor buys a call and a put option at prices above and below the current stock price, respectively. The trade-off, relative to the straddle, is that the stock must move even more for the strategy to work.

Best to use when: The long strangle is used when you expect the stock to move even more than you would when using a long straddle. So if you expect a big move in the stock, the long strangle can be cheaper to set up and deliver a higher percentage return than the straddle.

Example of the long strangle: STK stock trades at $100 per share, and puts with a $90 strike price are available for $5 with an expiration in six months. Calls with a $110 strike price are available for $5 with an expiration in six months. The total cost of the trade is $1,000, consisting of the put (one contract * $5 * 100 shares) and the call (one contract * $5 * 100 shares).

Here’s what the trade will return at expiration, including the cost to set up the position.

Stock price at expirationCall’s profitPut’s profitTotal profit

$130

$1,500

-$500

$1,000

$120

$500

-$500

$0

$110

-$500

-$500

-$1,000

$100

-$500

-$500

-$1,000

$90

-$500

-$500

-$1,000

$80

-$500

$500

$0

$70

-$500

$1,500

$1,000

Risk/reward: Like the long straddle, the long strangle can return a high percentage, theoretically uncapped if the stock rises. Similarly, it’s also a wager that the stock will move significantly in either direction, without the investor having a clear sense of which way. The main advantage of the strangle over the straddle is that it requires less money to set up.

The maximum downside of the long strangle is the complete loss of the premiums paid if the stock fails to move much. Because the options were purchased out of the money, it takes a more significant move to recapture some of the premium, though it is possible if time remains on the options.

Options trading FAQ

Options trading is simply when an investor trades options, which are contracts between a buyer and seller to either purchase or sell a security (typically a stock) at a given price by a certain time. There are two broad categories of options, calls and puts. With a call option, you have the right to buy a stock at a certain price. With a put option, you have the right to sell a stock at a certain price.

There are a plethora of options trading strategies, and common ones that are often recommended for beginners include straddles and strangles, covered calls and selling iron condors. Earlier in this article, you’ll find more in-depth explanations and examples of seven popular options trading strategies.

You can only trade options through a brokerage that is approved for options trading, like E*TRADE or Fidelity. Other popular options trading platforms include TradeStation, TD Ameritrade, Interactive Brokers and Charles Schwab.

When you trade options, you have the potential to make money in several different ways. This includes locking in a price for a stock for a specified period of time without actually having to commit to buying the stock, buying stock at some point in the future for a discounted price and generating income for stocks in your current portfolio.

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