Option is one of the most versatile trading instruments available. There are various option strategies exist to cater to traders with different risk profile, type of personalities and amount of capital or time available.
Many new option traders are being attracted to buying option.
This is due to the fact that they are familiar with buying stock (or other assets such as buying a house).
They may also hear from their friends or brokers that buying option has limited risk and unlimited profit potential. However many of them did not know that selling options is also one of the ways to achieve a consistent profit.
So… what is the best stock option strategies? To have better trades, should you buy or sell options? The quick answer is that sometime there are advantages to buy options and sometime selling options has its benefit. Which option strategies to apply will depend on your goals, your view on the underlying stocks and general market. Ideally, you should develop strategies for both buying and selling of options.
Before entering into an option contract, you should have a view on the underlying stock that you are going to invest. Is it bullish, bearish or will it going to move sideway? As option has a fixed expiration date, you will also need to know when that move is possibly going to happen and how far the underlying stock might move. Therefore the option trading strategies employed has to take into account your judgement on the underlying stock’s direction, timing of movement and how volatile the movement will be.
The basic option strategies can be broken down into Long Call, Long Put, Short (Naked) Call and Short (Naked) Put. Once you have master the basic framework of these 4 option trading strategies, you will be able to better understand other more advances strategies.
Lets look at the various options strategies that can be applied to the general market directionBullish Strategies
All of us come to the market with our own strengths and weaknesses. There are traders who are naturally bullish and some bearish; Some can monitor the market the whole day and some only look at it once a month (or longer); Some of us may be confident in trading in the long term while others believe in short term trading. Some of us may be terrified by the unlimited risk profile of certain strategies but others will succeed with the proper application of it.
The key is to find the winning option trading strategies that fit your strengths and avoid your weaknesses. Every trader has his own unique risk tolerance, personalities, amount of capital and time available. Therefore, apply the strategies that match your risk tolerance, investing style and confidence level.
Thoroughly understand yourself and apply the option strategies that can help to maximize your probabilities of success and limit the risk of losses. Remember, the more knowledge you have about the market and yourself, the greater your chances of success.
Use this space to discuss on any option strategies related topic. Ask a questions or share with other traders how a particular strategy fit into current market conditions.
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