April 1, 2011 10:15 pm

Option Trading Ideas

 
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Not all options investors have the same investment goals. Some stock options investors never buy the stock. Some investors only use options to purchase stocks. Option trading ideas are ways that individual investors use stock options to reach their goals.

Investing in options can be a way for investors who want to own a stock to purchase the stock at a discount. If an investor sells an out of the money put option for every one hundred shares that the investor wants to own.

The investor then waits to see if the stock price declines to the strike price of the put options. The investor can buy the stock at the strike price and save money. If the options are not exercised, the investor has the premiums from the put options as profit.

Another option trading idea can be ideal for an investor who wants to own the stock. An investor might buy a call option for a stock they want to own. If the price of the stock rises above the strike price, the buyer can buy the stock for less than its market value. Some investors will follow that process and immediately sell the stock in order to receive their profit.

Stock options can be used to manage the risk associated with stocks that the investor already owns. If an investor predicts that stock that he owns may decrease in value, the investor might buy one put option for every one hundred shares that the investor owns.

If the price of the stock falls, the investor can exercise the put and sell the stock at the strike price even if the value of the stock fell significantly lower than the strike price. In this way, the investor has set a limit on the loss of value of the stocks in the investor’s portfolio.

Some options trading ideas are used for particular market activity. A bull call spread is an example of a bullish strategy. It involves buying a call option and selling an out of the money call option. The investor exercises the long call if the stock price moves above the strike price plus the premium paid for the option.

A bear put spread is a bearish trading idea meaning that the investor expects the value of the stock to fall. For a bear put spread, the investor buys an in the money put option and sells an out of the money put contract for the same stock. The investor exercises both put contracts if the stock price falls below the put strike price.

A straddle is considered a complicated options trading idea. This strategy is used when the investor expects the stock to experience a large change in value without knowing whether the stock will jump up or fall.

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Disclaimer: The risk of loss in trading any financial vehicles such as securities, options, futures and forex can be substantial. Members must consider all relevant risk factors, including their own individual financial situation, before going into trading. Options involve risk (as in trading with any other channels) and are not suitable for all investors. See Characteristics and Risks of Standardized Options. Past results of any individual trader or trading system published by us are not indicative of future returns by that trader or system, and are not indicative of guaranteed future returns which may be realized by members.

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