Option Trading Strategies – One Step Forward

If you are new in the options trading and just got finished with familiarizing with the idea, you might probably be thinking about option trading strategies. Even you have all the basic ideas about options trading, you’ll need a good strategy to make this work for you.

Before you start your trade on option, you must figure out a strategy. Simplest strategy is a long call option. Which is just buying a single call option. But it is just one among many other option trading strategies. Some of them are much more complex, incorporating buying and selling many options, both put and call. In general, they can be divided into three types. One being bullish, which believes the market rates will rise. The next is bearish, which believes the market rates will fall. And the last being neutral, believing the market rates may not change.

As it is said earlier, option trading strategies can be complex and incorporate buying of multiple put and call options, which may increase the chance of profit or decrease the amount of maximum risk. They can all end on same days or different days. Have same strike price or different ones. It all depends on the market understanding of the buyer and their future plan.

An example can demonstrate how a good strategy can be helpful in options trading. Say, you’ve bought a call option and a put option both of a stock at a strike price of $100. If the price of the options are $5 each, your total cost of the option is $10. Now, if the price of the stock increases up to $120, you can exercise the call option and your net gain would be $120 – $10 – $100 = $10. But if the price falls below $80 then you can buy the stock directly at $80 and exercise the put option. In that case also, your gain would be $100 – $80 – $10 = $10. So, if the market moves either way, you can gain from this strategy. Only way you will lose if the market doesn’t change, in that case your risk would be limited to only $10.

A very basic of the option trading strategies is to buy options that are greatly under-priced. In this way, the window of profit increases and the maximum risk amount decreases. Another very important key is the knowledge of what happening in the market. It can enable you to find a position in which the market moves to direction you want. It is not as simple as it sounds, it depends on a thousand factors which can go wrong, but it is a requirement to do successful trading.

So, it is a good idea to know more about various option trading strategies and applying a good strategy for option trading business. For this, you can consult various licensed firms and consultants to get good advice.