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One Out of Many: Picking Option Trading Strategies

Option Trading Strategies

Many Different Option Trading Strategies

Given the small number of variables involved, one would ordinarily suspect that picking option trading strategies would not be much more complicated than flipping a coin, but this is not the case. While the basic bull market call and bear market put strategies are certainly viable, they remain limited in usefulness when the market is not in full up or down mode. In times such as these, where the market seems poised to move in either direction, different options trading strategies need to be explored.

Refined Option Trading Strategies

• The long straddle is an option strategy that is often employed in cases where market uncertainty makes some sort of move likely but the direction of the move remains uncertain. The player purchase both a long put and a long call at the same strike level and date. Assuming the stock moves to a significant degree, the out of the money option is valueless and the other option pays off handsomely enough to wipe out the value lost with the expired counterpart option and provide a nice return on top of it.

• A variant of the long straddle is the long strangle, which works in the same fashion with the exception that the strike prices are different between the put and call rather than equivalent. The difference between straddle and strangle is that the straddle apportions risk equally in both directions, while the strangle can slant the equation somewhat in favor of the put or the call depending on the investors personal inclinations.

• Another options play employed during neutral markets is the iron condor. The iron condor involves the purchase of an out-of-the-money put and a similar call, coupled with the selling of an out-of-the-money put and equivalent call. While the other strategies are aiming at maximum return, an iron condor is a safer play that is more likely to pay off but less likely to pay off big time.

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Option Tips and Strategies For Trading Options

Option Tips – Where to Learn About Trading Options

Option TipsThe most important of all option tips is that before even considering trading options, take the time to learn about options trading and options trading strategies.  A preliminary options trading education and introduction to option tips can be found in the following articles:  Option Trading Basics, Trading Call Options, and Managing Options Trading Risk.

Investopedia.com provides a good introduction to options trading and option tips in an entry called Options Basics:  Introduction.  More detailed options trading information and option tips are available at Optiontradingpedia.com.  These are just two of many sites on the Internet that provide options trading information and option tips.  It is highly recommended that an investor that is new to options trading gain a firm understanding of the risks and rewards associated with options trading prior to commencing with options trading.

Option Tips and Strategies for Trading Options

One of the most important option tips is to understand that options have a number of different uses in the stock and commodities markets, and therefore, options trading strategies vary depending upon why options are purchased.  Certain options trading strategies do not apply to every options trade.

Call options are purchased when one anticipates that a stock or commodity will make a move higher before the option expires.  Put options are purchased when one anticipates that a stock or commodity will make a move lower before the option expires.  Buying put and call options can be used as a pure trading strategy to try to make money from an anticipated price move or as a hedging trading strategy to protect an existing position held in a stock or commodity.

The most common of all option tips is to buy Call options for a stock or commodity you expect to move higher rather than the stock or commodity itself.  Call options allow traders to reduce the amount of capital needed for a trade and to protect against an unanticipated drop in price of a stock or commodity.  The advantage of playing a stock or commodity on the long side via Call options is that the downside risk can be quantified as the price paid for the option.  Also, not as much money has to be committed to the trade since Call options cost just a fraction of the price of a given stock or commodity.

Another one of the common option tips is to buy Put options to protect the downside risk of a stock or commodity one is holding long, but does not want to sell.  A Put option gives one the right to sell the amount of shares or commodity covered by the option (typically a block of 100 shares for each option) at the specified option strike price prior to the option expiration date.  If one has a gain in a stock or commodity and want to ensure that no matter what happens to the price of the stock or commodity due to unforeseen events, one can get out with a profit, Put options are a good way to protect that gain.

One of the commonly overlooked option tips is to use limit orders to buy and sell options.  Use of limit orders when buying and selling Call and Put options can save money, especially if one is an active options trader.

A summary of option tips would not be complete without the standard warning that all options traders must understand about the difference between stocks and options.  Unlike stocks, options suffer from price decay as they approach their expiration date, which means they methodically lose value over time.  Once the expiration date is reach, an option will expire worthless, unless the strike price of the option has been exceeded to either the upside or downside, depending upon if it is a Call or Put option.

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