March 23, 2011 1:52 am

Option Trading Strategies

 
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Option trading strategies are trading methods to help an investor reach their investment goals for their portfolio. The best option trading strategy for one individual may not be the best for someone else. After making an educated decision about investment goals, the investor should focus their efforts on the best option trading strategies tailored to deliver those results.

A common goal for options trading is to make a profit. There are two basic ways investors profit from options trading. An investor can make money solely by trading options. Profit can also be made by exercising a stock option and buying or selling the stock.

For example, if someone buys call options and the price of the stock goes up, the investor can buy that stock at the strike price specified in the call option. That person can sell those stocks immediately to make a profit.

If someone has the option trading goal of owning a stock at a good price, that investor would use a different option trading strategy. An investor wanting to own stock may choose to sell a put option to give the buyer of the put the opportunity to sell the investor the stocks they want at the strike price.

Some stock investors use option strategies to protect their stock investments. A protective put is such a protective measure. The investor might buy a put to limit any loss in the value of the stock by giving the investor the right to sell the stock at the strike price. A protective put is also called a synthetic long call or put hedge.

Another protection strategy is an equity collar. The equity collar is used to protect stock the investor owns. An investor using an equity collar purchases one put option and sells or writes one call option per one hundred shares of the stock that the investor owns.

The state of the market can affect which option strategies are used. For example, if the stock is bullish meaning it is rising in value, the investor might want to use a option trading method called the bull call spread. A bull call spread is when the investor purchases an at-the-money call option and sells an out-of-the-money call with a higher strike price.

Similarly, a bear put spread is an options trading method that can be used if the investor expects the price of the stock to drop. To use the bear put spread strategy, the investor buys a put option on a stock and sells a put option for the same stock at a lower strike price.

Investors need to learn how to implement option strategies that will yield the results they want based on their investment goals. Details about various strategies for options trading can be researched online. The investor may want to consult an experienced investor.

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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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