Re-think your options

Options are often described as risky and complex investments, but that’s not the case for all strategies. Options may be used in a transparent and tax efficient manner to accomplish specific goals and reduce risk.

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What are options?

Options are contracts between two people who are willing to buy or sell an investment at a specific price in the future.

Do more with your current investments

Option strategies sit “on top” of your existing holdings, making it easier to achieve desired outcomes without the process of selling one investment to buy another.
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Generate income on existing stocks, bonds, or cash.
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Protect concentrated stock or a portfolio from severe losses.

Every strategy has its trade-offs

It’s important to know what you gain and what you give up when using option strategies and making sure they align with your goals.

What is your investment goal?Trade-offPotential strategies
What is your investment goal?Generate additional income on stocks Trade-off•Sacrifice growth for income Potential strategies•Covered call
What is your investment goal?Generate additional income on cash Trade-off•Take on downside equity risk
•Upside limited to income		 Potential strategies•Put writing
What is your investment goal?Manage portfolio risk or help protect the value of an asset Trade-off•Can be expensive
•Cost can be reduced, but will sacrifice growth		 Potential strategies•Protective put
•Collar
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Delivering income with option strategies

Income strategies involve balancing priorities. If you want income with options you have to give up some or all growth potential. This always involves selling an option contract to receive the option premium. Two common strategies are covered calls and put writing.
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Covered call

A covered call generates income by selling a call option on a stock that you own. Covered calls sacrifice capital appreciation in the stock for income, but investors are in control of striking the right balance of growth and income.

Put writing

Put writing generates income by selling put options, creating an opportunity to purchase a stock at a discounted price. Put writing adds equity risk and the income received is the only source of return.

Protecting investments with option strategies

Protective strategies may be used to protect a stock or a portfolio from a catastrophic loss. They involve paying a premium for the selected level of protection. Two common strategies are protective puts and collars.
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Protective put

A protective put involves purchasing a put option. Investors pays a premium to set a floor on an existing investment. Riskier assets, higher floors, and long-term contracts can increase the cost of the premium relative to other put options.

Collar

Want to protect the value of an investment, but prefer to do it at a lower cost? Collars put guardrails on an investment by combining a protective put and a covered call at zero cost. Just like a covered call, there is limited upside.
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Learn about payoff graphs

Payoff graphs are a common way to visualize option strategies, but they can be tricky to understand if options are a new concept for you.

Watch our video to better understand how to interpret these graphs.

The roles of option buyers and sellers

Just like any financial contract, each party has certain responsibilities outlined in the contract.

Buyer

The option buyer always pays for the contract. The cost of the contract is called the options premium. It gives them the right to exercise the contract. An exercise will result in the purchase (or sale) of the stock at the agreed upon price.

Seller

The option seller (also called the “writer”) is paid the option premium by the buyer when they both enter into the contract. They have an obligation to fulfill the contract, if the buyer exercises the option. This is called an option assignment.

Option terms

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Premium
The price paid by the buyer and received by the seller for the contract.
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Expiration
The date that an option contract matures.
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Strike Price
The agreed upon price to exchange cash for an asset.

Understanding options risks

  • Option buyers can lose 100% of the premium they paid.
  • Option sellers can be exposed to unlimited losses if they don’t own the underlying security (call writing) or have collateral (put writing).
  • Collars are not guaranteed to be cost neutral.
  • If assigned, an option seller may be forced to buy (or sell) an asset at a less favorable price than the current market.
  • Options may be assigned prior to the expiration date, which can result in missing a dividend payment.
  • Investors should consult with a tax professional on the tax implications of each strategy.