Options Hedging Strategies

Options hedging strategies

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Important information

Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Covered calls provide downside protection only to the extent of the premium received and limit upside potential to the strike price plus premium received. Multiple-leg options strategies will involve multiple commissions. Spread strategies must be done in a margin account. With long options, investors may lose 100% of funds invested. Please read the options Disclosure Document titled "Characteristics and Risks of Standardized options" before considering any option transaction. Call your local Schwab office or write Charles Schwab & Co., Inc., 211 Main Street, San Francisco, CA 94104 for a current copy.

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Schwab does not recommend the use of technical analysis as a sole means of investment research.

Idea Hub offers self-directed investors the ability to explore new trading ideas for options that are determined based on pre-set screening criteria. Please note that Idea Hub does not consider open orders, existing positions, or other factors, and is solely intended for educational and informational purposes. The examples within the Idea Hub are not intended as recommendations to buy, sell or hold any particular security nor implement any particular strategy. Users of the Idea Hub should not make investment decisions based solely upon the ideas generated by this tool. You are solely responsible for your investment decisions, and should carefully evaluate the examples to help determine whether or not they are right for you based on your own personal situation. The use of this tool does not constitute an investment recommendation by Schwab, and should also not be considered financial, legal or tax advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

For the sake of simplicity, the examples in this presentation do not take into consideration commission and other transaction fees, tax considerations, or margin requirements, which are factors that may significantly affect the economic consequences of strategies displayed. Please contact a tax advisor for the tax implications involved in these strategies. Stock and option symbols, and price and volume data shown are for illustrative purposes only.

Agenda

01

Covered calls

03

Collars

02

Protective puts

04

Demo and factors to consider

01

Covered calls

Covered calls

A trader owns a stock and sells someone the right to buy the stock at the strike price on or before expiration.

Profit

Note: Chart depicts strategy at expiration.

Strike price

Lower price 0

Higher price

Loss

When to consider covered calls

When you want help generating income

When you'd like limited downside protection

When you want to strategically exit a position

Covered calls summary

Advantages

Can be profitable with little or no movement in the underlying

Limited downside protection* Strategy can be repeated Can be held until expiration, or generally

closed out prior to assignment or expiration

*limited to amount of premium received

Disadvantages

Limited profit potential above the strike price

Stock position is still vulnerable to downward price movement

Give up stock, if short call assigned May lose dividend due to early assignment

02

Protective puts

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