Glossary

The four simple strategies shown above can be very useful. For example, buying a put option can be a good way of protecting a holding of a share whilst still being able to benefit from any rise in the share price.

Similarly, selling a call option can be a useful way of enhancing the return on a share portfolio in situations where one expects the shares to rise by only a small amount or not at all.

There are a large number of option strategies commonly used in the financial markets. Many involve combinations of bought and sold options, calls and puts with the same or different exercise prices, and so on.

The aim of these strategies is always to create a portfolio that will generate the maximum profit from the expected movement in the underlying. The benefit of using options is that one is able to match ones view much more precisely than would be possible with non-derivative assets.

The next section examines the valuation of options.