Option trading strategies You Should Know About

Just like every other tool in the market of the investing, in options trading the key to success are option trading strategies. As everything in the stock market, any major gain or catastrophic failure depends on how much information you have and what strategy you come up with to use the resources in your hand. It is up to you to decide your moves and use it for your own good.

Before talking about option trading strategies, the idea about options and their types should be clear. Option is a contract which gives you the right to buy or sell some stocks at a specified price within a specified time. The specified price is called strike price and the specified time is the date of expiration. There are two types of stock option. One is a call option which gives you the right to buy a stock at the strike price. Another is a put option which gives you the right to sell a stock at the strike price. Note that, options give you right, not obligation, meaning you can exercise the option or not ifyou wish. While exercising the option, you get to buy or sell the stock, as stated in the contract at the strike price regardless of the stock’s real price.

So, for the option trading strategies, buying more than one type of option together can be stated as an option trading strategy. Even, some strategies can include buying only one option. Basically, the strategies can be divided into three types, Bullish, Bearish and Neutral.

Bullish strategies are such that it gets profit if the price of the stocks increases. People applying these strategies hope that the price will increase and the profit will come from buying the stock at lower strike prices than the new market price. Buying simple long calls can be one type of bullish strategy. Other strategies in this type include, Short Put, Long Synthetic, Call Backspread, Call Bull Spread, Put Bull Spread, Covered Call, Protective Put, Collar etc.

Bearish strategies get profit from decline in the stock’s market price. It has domination of the put options in complex strategies or can include only few put options in simple cases. This type includes strategies like Short Call, Long Put, Short Synthetic, Put Backspread, Call Bear Spread, Put Bear Spread etc.

Neutral strategies are of two types. One is much common and gets benefit from both upward and downward change in market position. Other is less common and gets benefit from non-changing market position. Neutral strategies may include Long Straddle, Short Straddle, Long Strangle, Short Strangle, Long Guts, Short Guts, Call Time Spread, Put Time Spread, Call Ratio Vertical Spread, Put Ratio Vertical Spread, Long Call Butterfly, Short Call Butterfly, Long Put Butterfly, Short Put Butterfly, Long Condor, Short Condor etc.

So, it is very important to have detailed knowledge about various option trading strategies before trying out it in the market. More research about them as well as consulting licensed firms about options trading is advised if you are thinking on trading options.

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