Stock Option Basics

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Option rookies are often eager to begin trading — too eager. Explaination of stock option trading strategies is less risky than owning stock. Most involve limited risk. For investors not familiar with options lingo read our beginners options terms and intermediate options terms posts. Using stock you already own or buy new sharesexplaination of stock option trading strategies sell someone else a call option that grants the buyer the right to buy your stock at a specified price.

That limits profit potential. You collect a cash premium that is yours to keep, no matter explaination of stock option trading strategies else happens. That cash reduces your cost. Thus, if the stock declines in price, you may incur a loss, but you are better off than if you simply owned the shares. Cash-secured naked put writing. Sell a put option on a stock you want to own, choosing a strike price that represents the price you are willing to pay for stock.

You collect a cash premium in return for accepting an obligation to buy stock by paying the strike price. A collar is a covered call position, with the addition of a put. The put acts as an insurance policy and limit losses to a minimal but adjustable amount. The purchase of one call option, and the sale of another. Or the purchase of one put option, and the sale of another. Both options have the same expiration. Thus, the higher priced option is sold, and a less expensive, further out of the money option is bought.

This strategy has a market bias call spread is bearish and put spread is bullish with limited profits and limited losses. A position that consists of one call credit spread and one put credit spread. Again, gains and losses are limited. Diagonal or double diagonal spread. These are spreads in which the options have different strike prices and different expiration dates.

The option bought expires later than the option sold 2. The option bought is further out of the money than the option sold. The likelihood of consistently making money when buying options is small, and I cannot recommend that strategy.

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Performance - Plain and Simple. Options are one of the most dynamic investment vehicles available to traders and investors. Option strategies allow the trader to purchase stock options that are close to the stock price at the money , or they can choose to urges options that are far away from the current stock price out of the money , or they can buy options that already have intrinsic value in the money.

They can also choose a variety of expiration months. Near-term options are called front month, farther out options are called back month and options with six or more months of life are called LEAPS.

They can also by and sell various options simultaneously. This is called an option spread. Some of the more common option spreads are: Ultimately, your opinion of the market and the underlying stock should determine your option strategy. The strategies carry various amounts of risk that traders must be aware of.

Option Trading Strategies Options are one of the most dynamic investment vehicles available to traders and investors. Back month stock options have more than one month before they expire. They are slightly less An iron condor is typically a non-directional option spread where the trader sells an out of the The Time Value of an Option is the amount by which the price of a stock option exceeds its An option contract gives the buyer of the option the right, but not the obligation to buy call A call option is where the strike price is lower than the current price of the stock is considered In a Synthetic Call Option , the investor can create a pseudo call position by buying puts that A derivative in the context of finance is a contract whose value is dependent on another An option spread is created when a trader simultaneously buys and sells options with different In a Butterfly Spread strategy, all of the expiration months are the same.

A trader buys a call Stock options are a wasting asset. From the day you purchase them, their value goes down if the For in-the-money call options, intrinsic value is the difference between the stock price and the LEAP stock options have more than six months until expiration. They can have a lifespan of up to A Diagonal Spread is an option spread where the trader buys a longer-term option and sells a Option Strategies - Good and Bad!