There are a variety of ways to make money using options. In general, both buying or selling options can make an investor money. There are two primary reasons to buy and sell options-- speculation and hedging.

Speculation is betting on the price of a stock to either rise or fall. When you simply buy a stock, you can only make money when the stock price goes up. The principal rises with the stock's value. Using options, you can make money when the asset goes up, down, or remains stagnant. Options enable the holder to acquire the right to stocks without paying the full price of the shares up front. The difference between the price of the stock and the option can be invested elsewhere until the option is exercised, making additional profits.

Hedging is a form of insurance that makes an investment in one asset to reduce the risk of price movements in another asset. Hedging reduces the overall profit potential, but it protects from large losses when the asset's value goes down. Hedging can produce profits, but most money is made using speculative strategies.

There are two basic types of options: put options and call options. Either can be bought or sold. When you purchase a put option, you buy the right to sell the asset on or before the expiration date of the contract. Call options give the holder the right to purchase the asset at the strike price on or before the expiration date. In general, investors buy put options when they believe the value of underlying investment will fall in value; they buy call options if they think the value of the underlying investment will rise in value.

The option gives the buyer a right and creates an obligation for the seller; consequently, the buyer pays an option premium to the writer. This is the price of the option. The buyer begins the contract with a net debit, because they paid an initial fee for the right to the option. The buyer must subtract the cost of the premium from any profit to realize their net income. If the option is not exercised, the buyer forfeits the price of the option. The seller starts the contract with a net credit after collecting the premium. If the option is never exercised, the seller keeps the money. If the option is exercised, the seller keeps the premium, but must buy or sell the underlying asset, depending on the contract.

The value of an option depends on whether or not it is in-the-money. A put option is in-the-money if the current value of the asset is below the exercise price and out-of-the-money if it is above it. If an option is not in-the-money at expiration, the option is worth nothing. A call option is in-the-money if the current value of the asset is above the exercise price of the option, and out-of-the-money if the stock is below the exercise price.

Buying calls is one of the most straightforward and most popular option strategies. The bet with a long call is that the underlying stock rises in value. A call option enables an investor to lock in a low purchase price for a stock that may rise higher in the time specified in the option contract. Buying a call option offers potentially unlimited gain, carries limited risk, and is considered a solid investment during a rising market. If the stock price doesn't rise, then the contract can expire or be sold, and the investor simply loses the option premium or breaks even, rather than all of the money that would have been invested in purchasing shares.

When an investor buys a put option, they own the right to sell the underlying asset at an agreed upon price until the contract's expiration. When the price of the underlying asset falls, the investor makes money. The more the price falls, the more money is made. Per the contract, the seller of the option must buy the asset at the agreed to price, even if it is higher than the market price. The buyer then purchases the asset for lower market rate, selling it to the option's seller for a profit. The maximum loss for buying a put option is the cost of the premium plus any related fees. The maximum profit for a buying put option is limited only by the stock falling to zero. Another way money can be made from buying a put option comes from offsetting or selling the contract before the expiration. If the price of the underlying stock falls, the value of the put increases. The put contract can then be sold for a profit.

Selling call options is a popular investment strategy. The seller bets that the underlying stock price will fall, while the buyer believes it will rise. If the stock price falls, the seller has locked in a guaranteed sale at a higher price. The seller also receives a premium from the buyer for offering to sell the shares at the exercise price of the option. Selling calls is usually a strategy used by investors who hold the underlying shares. More aggressive investors who do not own the shares and who speculate on stock prices also utilize this option strategy.

Most investors utilize the basic strategy of selling put options so they can generate additional income from the premium during flat markets. Investors usually believe that the share price will remain steady or increase slightly over the option's life. When selling put options, the seller's profit is limited to the premium received. The maximum loss is unlimited as the seller gradually losses more and more money as the underlying stock price falls all the way to zero.

A number of basic options strategies help lower trading risk. Profit potential exists, but the primary goal is to limit risk.

The married put provides the benefits of owning stock while protecting against market downturns. Matching or marrying owned shares of stock with an equivalent number of put options on the same underlying stock limits risk by protecting the stock from a decrease in market price. No matter how much the underlying stock decreases in value during the option's lifetime, the investor locked in a guaranteed selling price. Profit is unlimited, while the maximum loss is limited to the stock purchase prices less the strike price, plus the premium paid.

The protective put limits the risk that gains from previously purchased shares that have gained in value will decrease. No matter how much the underlying stock decreases in value during the option's lifetime, the put guarantees the investor the right to sell at the strike price. The potential profit using a protective put strategy is unlimited. If the put expires in-the-money, any gains realized from in an increase in its value will offset any decline in the unrealized profits from the underlying shares. If, however, the put expires at- or out-of-the-money, the loss is limited to the premium paid for the put.