Basic Options Trading Strategies and Concepts

There are a number of basic trading strategies out on the market, but if you want to execute any of them successfully, you will need to know some basic concepts in the market.

The first thing to consider are the calls and puts. In the options market, these are your two basic choices. There are, however, different variations to the concepts.

The long call is the easiest variation to understand. If a stock is trading at $28 and the trader wants to make money, the stock will need to get up to $31 for a profit.

Short or naked calls is when there seller does not own the stock that he is obligated to sell should they choose to exercise the option. If that is the case, he will be selling a naked call. Because he’s on the selling side of that contract, he will said to be in the short position. If the market price of the asset goes down, the short call position will gain profit by the premium. If the price rises, conversely, to be above the strike price above the premium, the short position will not see a profit but a loss.

The long put is when a trader thinks that the price of an asset is going to fall right before its expiration date. They can then buy the right to sell the stock at a fixed price. The put buyer does not have an obligation to sell the asset, only the right to do so if they choose to exercise the option. If the market prices does not fall below the strike price before the expiration date comes up for the options contract, then he will profit. If the price increases and doesn’t at least cover the premium, he will lose money.

The short put is when a trader thinks that the future market price of an asset is going to go up. They can then sell the right to sell the asset at a specific price. If the asset’s price goes up, the short put positions will make a profit at least to that of the premium. If the price goes below the strike price by more than the premium amount, the trader will effectively lose their investment.

There are different trading strategies that can use the characteristics of these positions to the best advantage. They will either be used for pure profit or they will have a combination of speculation and hedging overall risk in the investment.

Hedging is when you take opposite positions in opposing directions in order to eliminate risk in the investment. Of course, if you lose, you can always write off more of your capital gains tax problems.

Bull spreads will use a long call with a small strike price and a short call with a higher strike price and a short put with a higher strike price. The bear spread will use a short call with a low strike price and a long call with a high strike price.

You can always find software to help you figure out these combinations and help you to read the market as well for future investments for the most amount of gain.

         

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