Best stocks for buying options

In return, by selling the option, the trader is agreeing to sell shares of the underlying at the option's strike price, thereby capping the trader's upside potential. In exchange for this risk, a covered call strategy provides limited downside protection in the form of premium received when selling the call option.

A protective put is a long put, like the strategy we discussed above; however, the goal, as the name implies, is downside protection versus attempting to profit from a downside move.

If a trader owns shares that he or she is bullish on in the long run but wants to protect against a decline in the short run, they may purchase a protective put. If the price of the underlying increases and is above the put's strike price at maturity , the option expires worthless and the trader loses the premium but still has the benefit of the increased underlying price. Hence, the position can effectively be thought of as an insurance strategy.

The trader can set the strike price below the current price to reduce premium payment at the expense of decreasing downside protection. This can be thought of as deductible insurance.

The following put options are available:. The table shows that the cost of protection increases with the level thereof. If, however, the price of the underlying drops, the loss in capital will be offset by an increase in the option's price and is limited to the difference between the initial stock price and strike price plus the premium paid for the option. These strategies may be a little more complex than simply buying calls or puts, but they are designed to help you better manage the risk of options trading:.

Options offer alternative strategies for investors to profit from trading underlying securities. There's a variety of strategies involving different combinations of options, underlying assets, and other derivatives. Basic strategies for beginners include buying calls, buying puts, selling covered calls and buying protective puts.

There are advantages to trading options rather than underlying assets, such as downside protection and leveraged returns, but there are also disadvantages like the requirement for upfront premium payment. The first step to trading options is to choose a broker. Fortunately, Investopedia has created a list of the best online brokers for options trading to make getting started easier. Chicago Board Options Exchange.

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These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. Here's an options trading fee comparison when trading 10 contracts for our top picks.

Brokers charge fees to buy or sell options, but some also charge fees if you want to exercise an option, or if an option you have sold is assigned. Most of our picks for best options brokers don't charge these fees anymore. If you don't plan on holding options until their expiration dates, this shouldn't necessarily be an issue, but it's still worth keeping in mind.

Why Should You Trade Stocks With Active Options?

One key point to keep in mind is that there's no such thing as a perfect brokerage for everyone, and the costs and features should be weighed with your own preferences in mind before you open a brokerage account of your own. For example, Robinhood has no commissions for options trades whatsoever, but its platform is very light on functionality and features, which makes it appropriate for investors who don't necessarily need educational resources and just want to dabble in basic call and put trades.

Robinhood is the cheapest option broker we recommend. While there are other options brokers with full commission-free options trading, Robinhood goes the extra mile. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. The Motley Fool has a Disclosure Policy.

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Robinhood Open Account. Rating image, 4. Bottom Line Robinhood is an efficient trading platform that captures a spot as one of the cheapest options brokers. Read Full Review.

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Special Offer Get a free stock with a new account. TradeStation Open Account. Bottom Line A discount broker that's designed for active traders and cost-sensitive investors. TD Ameritrade. Rating image, 5. Bottom Line Stands out as not only one of the top options brokers but also a top rated all-around brokerage with outstanding tools and and comprehensive research. Read Review. Bottom Line Caters to active traders with multiple trading platforms, while also appealing to long-term investors with thousands of mutual funds and ETFs that can be traded for free.



Ally Invest. Interactive Brokers. Bottom Line The competitive base options commission and tiered per contract pricing, alone, land Interactive Brokers a spot on this list. Bottom Line A true, options-first stock broker, that sprinkles in the ability to trade mostly stocks, ETFs, and futures. Options come with their own unique terms, which investors should understand before making a trade: Call option: These options give you the right to buy stock at a certain price in the future.

Put option: These options give you the right to sell stock at a certain price in the future. Premium: This is simply what each option costs. Strike price: The price at which the option gives you the right to buy or sell stock. Expiration date: The date at which the option expires.