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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. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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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.

Below are seven of the most popular strategies, ranging from basic to modestly complex.

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 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.

Bottom line

These seven options strategies are among the most common, but there are many others that combine calls and puts into a strange mix of payoffs and risks. It can be a dizzying array, so if you’re looking to get started in the options world, take a look at MagnifyMoney’s guide on how to trade options.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James F. Royal, Ph.D.
James F. Royal, Ph.D. |

James F. Royal, Ph.D. is a writer at MagnifyMoney. You can email James here

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Investing

J.P. Morgan You Invest Review 2019

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Chances are you’ve heard of J.P. Morgan Chase. It’s one of the major players in the financial space, and it’s long had a brokerage arm in addition to providing global banking services. Now, though, J.P. Morgan is getting into the online brokerage space with You Invest.

You Invest is an online trading platform that allows you to buy and sell individual stocks and exchange-traded funds (ETFs) without the need for a human broker. This review will look at what’s offered and provide you with the information you need to decide if it’s right for you.

You Invest offers a way for you to seamlessly connect your Chase bank account to your brokerage account. Additionally, you end up with access to plenty of educational materials and the ability to understand your total portfolio.

J.P. Morgan You Invest
Visit J.P. MorganSecuredon J.P. Morgan You Invest’s secure site
The bottom line: You Invest offers a fairly standard online brokerage experience with the perks of low-cost trading fees and a wealth of investor education.

  • Pay just $2.95 per trade after receiving 100 free trades.
  • Enjoy a large selection of investments, including stocks, bonds, mutual funds and ETFs.
  • Manage investments according to goals with the Portfolio Builder tool.

Who should consider You Invest

You Invest is ideal for beginning investors, especially those looking for education and assistance building a portfolio that will help them reach their goals. Intermediate and advanced investors also can benefit, but the educational tools and resources are especially helpful for novice investors.

Additionally, it connects to your other Chase accounts, making it easy for you to move money from your bank account to your brokerage account and vice versa. If you already bank with Chase, using You Invest to manage your portfolio might not be a bad choice.

While $2.95 per trade is a low cost, this product might not be the best choice for active traders. For traders who can keep their trade volume low, this can be an excellent brokerage since you receive 100 free trades in the first year after an account is opened — with the opportunity to qualify for more free trades in subsequent years.

J.P. Morgan You Invest fees and features

Current promotions

Up to 100 free trades

Stock trading fees
  • $2.95 per trade
  • $0 per trade for Chase Private Client, Chase Sapphire Banking, J.P. Morgan Private Bank and J.P. Morgan Securities clients
Amount minimum to open account
  • $0
Tradable securities
  • Stocks
  • ETFs
  • Mutual funds
  • Bonds
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $75 full account transfer fee
  • $75 partial account transfer fee
  • $0 inactivity fee
Commission-free ETFs offered
Offers automated portfolio/robo-advisor
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
Ease of use
Mobile appiOS, Android
Customer supportPhone, Chat, 5,100 branch locations
Research resources
  • SEC filings
  • Mutual fund reports
  • Earnings press releases
  • Earnings call recordings

Strengths of You Invest

The educational tools and insights provided by You Invest are where this offering shines. They help you find the right mutual funds and stocks, and get you to understand your investing needs.

  • Low trading fees: To start, you get 100 free trades from You Invest. After you use your allotment, trades cost only $2.95. Among online brokers that charge trading fees, this is one of the lowest. If you’re not an active trader, you might be able to avoid paying fees fairly easily. You can get more free trades each year if you use certain Chase banking products, such as Premier Plus Checking.
  • Educational resources: You Invest offers a number of helpful articles about investing, strategy and more. It’s possible for you to learn the basics and then apply them to your portfolio.
  • Portfolio Builder: If you have at least $2,500 in your account, you can take advantage of this tool designed to help you choose the right investments for your portfolio. You’ll receive guidance on putting together a portfolio based on your answers to questions designed to gauge your risk tolerance, investment goals and time horizon.
  • Powerful screening tools: You can use these tools to set parameters and then find assets that fit your requirements. A list of options appears, and when you’re looking at Mutual funds , You Invest also includes Morningstar ratings and analysis of where they might fit into your portfolio.

Drawbacks of You Invest

A review of You Invest wouldn’t be complete without a look at some of the downsides. In many ways, You Invest is a typical online brokerage option. Other than some of the educational and portfolio building tools, there’s not a lot to distinguish this from other brokers.

  • No standalone app: Rather than offering a standalone app, you access You Invest through J.P. Morgan Mobile. Until you get used to it, it can be somewhat disconcerting to navigate to your trading app within the regular app.
  • Limited account types: There are only two account options with You Invest: taxable and IRA. You can get a Joint taxable account as well as an individual account, and there is a Roth option with the IRA. However, if you’re hoping for a custodial account or 529, you won’t find it with You Invest.
  • No managed portfolios: Right now, you won’t find managed portfolios, but they are supposed to be coming in 2019. So if you’re more of a hands-off investor, you might want to wait until there are more options available.
Fees
$2.95 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

Up to 100 free trades

Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

Get up to $600 when you open and fund an account within 60 calendar days of account opening, depending on deposited amount.

Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

Cash bonuses are available for new accounts. Bonuses start at $50 if you deposit or transfer $10,000+.

Is You Invest safe?

Any investment comes with the risk of loss. However, You Invest is insured by the SIPC for up to $500,000. Additionally, J.P. Morgan is a member of FINRA. As a result, you’re reasonably protected — especially when you consider that this is a company with more than $1 trillion in assets under management. It’s not likely to fail.

Just make sure you understand your own risk tolerance before you invest. While insurance protects you from failure, you’re not protected from market losses.

Final thoughts

You Invest can be a great option for middle-of-the-road investors who want a little more flexibility in their portfolios but still need some guidance. There are a number of assets to choose from, and the educational tools and resources allow you to build a portfolio based on your long-term goals and expectations.

Depending on your goals, there might be other products that work for you. For those more interested in a hands-off approach, Betterment might be a more suitable choice. You also can make trades for less with a service like Robinhood. However, you might not get the same level of educational tools with Robinhood, and Betterment won’t let you personalize your portfolio to the same degree.

If you want a low-cost, personalized way to invest — learning as you go — and if you’re already a Chase customer, opening a You Invest account might be a good way to move forward.

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on J.P. Morgan You Invest’s secure website

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Miranda Marquit
Miranda Marquit |

Miranda Marquit is a writer at MagnifyMoney. You can email Miranda here

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Investing

How to Make Money in Stocks

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Putting money in the market is well-worn financial advice for a reason: Investing in stocks is one of the best steps you can take toward building wealth.But how, exactly, is that wealth built? How is money earned by purchasing stock market holdings, and what can you do to maximize the gains you make from your own portfolio?

How to make money in stocks: 5 best practices

The way the stock market works — and works for you — is as simple as a high school economics class. It’s all about supply and demand, and the way those factors affect value.

Investors purchase market assets like stocks (shares of companies), which increase in value when the company does well. As the company in question makes financial progress, more investors want a piece of the action, and they’re willing to pay more for an individual share.

That means that the share you paid for has now increased in price, thanks to higher demand — which in turn means you can earn something when it comes time to sell it. (Of course, it’s also possible for stocks and other market holdings to decrease in value, which is why there’s no such thing as a risk-free investment.)

Along with the profit you can make by selling stocks, you can also earn shareholder dividends, or portions of the company’s earnings. Cash dividends are usually paid on a quarterly basis, but you might also earn dividends in the form of additional shares of stock.

Micro-mechanics of how stocks earn money aside, you likely won’t see serious growth without heeding some basic market principles and best practices. Here’s how to ensure your portfolio will do as much work for you as possible.

1. Take advantage of time

Although it’s possible to make money on the stock market in the short term, the real earning potential comes from the compound interest you earn on long-term holdings. As your assets increase in value, the total amount of money in your account grows, making room for even more capital gains. That’s how stock market earnings increase over time exponentially.

But in order to best take advantage of that exponential growth, you need to start building your portfolio as early as possible. Ideally, you’ll want to start investing as soon as you’re earning an income — perhaps by taking advantage of a company-sponsored 401(k) plan.

To see exactly how much time can affect your nest egg, let’s look at an example. Say you stashed $1,000 in your retirement account at age 20, with plans to hang up your working hat at age 70. Even if you put nothing else into the account, you’d have over $18,000 to look forward to after 50 years of growth, assuming a relatively modest 6% interest rate. But if you waited until you were 60 to make that initial deposit, you’d earn less than $800 through compound interest — which is why it’s so much harder to save for retirement if you don’t start early. Plus, all that extra cash comes at no additional effort on your part. It just requires time — so go ahead and get started!

2. Continue to invest regularly

Time is an important component of your overall portfolio growth. But even decades of compounding returns can only do so much if you don’t continue to save.

Let’s go back to our retirement example above. Only this time, instead of making a $1,000 deposit and forgetting about it, let’s say you contributed $1,000 a year — which comes out to less than $20 per week.

If you started making those annual contributions at age 20, you’d have saved about $325,000 by the time you celebrated your 70th birthday. Even if you waited until 60 to start saving, you’d wind up with about $15,000 — a far cry from the measly $1,800 you’d take out if you only made the initial deposit.

Making regular contributions doesn’t have to take much effort; you can easily automate the process through your 401(k) or brokerage account, depositing a set amount each week or pay period.

Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

500 free trades with a qualifying net deposit of $100,000

Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

Get up to $600 when you open and fund an account within 60 calendar days of account opening, depending on deposited amount.

Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$500
Promotion
New accounts with a deposit of at least $5,000, may be eligible for a cash bonus, which can range from $100 to $2,500 depending on the amount deposited.

3. Set it and forget it — mostly

If you’re looking to see healthy returns on your stock market investments, just remember — you’re playing the long game.

For one thing, short-term trading lacks the tax benefits you can glean from holding onto your investments for longer. If you sell a stock before owning it for a full year, you’ll pay a higher tax rate than you would on long-term capital gains — that is, stocks you’ve held for more than a year.

While there are certain situations that do call for taking a look at your holdings, for the most part, even serious market dips reverse themselves in time. In fact, these bearish blips are regular, expected events, according to Malik S. Lee, CFP® and founder of Atlanta-based Felton & Peel Wealth Management.

So-called market corrections are healthy, he said. “It shows that the market is alive and well.” And even taking major recessions into account, the market’s performance has had an overall upward trend over the past hundred years.

4. Maintain a diverse portfolio

All investing carries risk; it’s possible for some of the companies you invest in to underperform or even fold entirely. But if you diversify your portfolio, you’ll be safeguarded against losing all of your assets when investments don’t go as planned.

By ensuring you’re invested in many different types of securities, you’ll be better prepared to weather stock market corrections. It’s unlikely that all industries and companies will suffer equally or succeed at the same level, so you can hedge your bets by buying some of everything.

5. Consider hiring professional help

Although the internet makes it relatively easy to create a well-researched DIY stock portfolio, if you’re still hesitant to put your money in the market, hiring an investment advisor can help. Even though the use of a professional can’t mitigate all risk of losses, you might feel more comfortable knowing you have an expert in your corner.

How the stock market can grow your wealth

Given the right combination of time, contribution regularity and a little bit of luck, the stock market has the potential to turn even a modest savings into an appreciable nest egg.

Ready to get started investing for yourself? Check out the following MagnifyMoney articles:

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Cattanach
Jamie Cattanach |

Jamie Cattanach is a writer at MagnifyMoney. You can email Jamie here