Options trading allows a market trader many ways in which to profit. Whether a stock goes up, sideways or even down, there are options strategies that allow a trader to profit from any move. Add to this the cost of a typical option, to that of the cost of buying a stock and you can see that many investors who might not have been able to trade are now active in the marketplace. Risk is another factor playing into options trader’s minds. Although options are considered a riskier style of trading verse stocks, there is generally less capital at risk since the cost of buying an option can be only a fraction of the original cost of buying a stock.
The most basic of options is the simple, buy and sell a call or put. This is used as a low capital means of garnering a profit on market movement. Options can also be used as insurance policies in a wide variety of trading scenarios. You probably have insurance on your car or house because it is the responsible and safe thing to do. Options provide the same kind of safety net for trades and investments. They also increase your leverage by enabling you to control the shares of a specific stock without tying up a large amount of capital in your trading account.
Options can be used to offer protection from a decline in the market price of a long underlying stock or an increase in the market price of a short underlying stock. They can enable you to buy a stock at a lower price, sell a stock at a higher price, or create additional income against a long or short stock position. You can also use option strategies to profit from a move in the price of the underlying asset regardless of market direction.
There are three general market directions: market up, market down, and market sideways. It is important to assess potential market movement when you are placing a trade. If the market is going up, you can buy calls, sell puts or buy stocks. Do you have any other available choices? Yes, you can combine long and short options and underlying assets in a wide variety of strategies. These strategies limit your risk while taking advantage of market movement.
The following list shows the variety of options strategies that can be applied to profit on market movement, this is not a complete list but a good place to start.
Bullish Limited Risk Strategies
Bullish Unlimited Risk Strategies
Bearish Limited Risk Strategies
Buy Call
Bull Call Spread
Bull Put Spread
Call Ratio Backspread
Calendar Spread
Time Diagonal Spread
Collars
LEAPS
Buy StockSell PutCovered CallCall Ratio Spread
Buy Put
Bear Put Spread
Bear Call Spread
Butterfly Long put
Put Ratio Backspread
Bearish Unlimited Risk Strategies
Neutral Limited Risk Strategies
Neutral Unlimited Risk Strategies
Sell Stock
Sell Call
Covered Put
Put Ratio Spread
Long Straddle
Long Strangle
Long Synthetic Straddle
Put Ratio Spread
Long Butterfly
Long Condor
Long Iron Butterfly
Short Straddle
Short Strangle
Call Ratio Spread
Put Ratio Spread
Learning more about the different uses of options can help you to boost your trading success. Understanding these different uses will give you the potential to beat the next person down the street or your sophisticated options market maker. You have a chance to look at different scenarios that they do not have the knowledge to construct. All you need to do is take one step above the next guy for you to start making money. Luckily the next person, typically, does not know how to trade creatively.
About the Author:
James DeHoiver is a professional engineer and full time trader specializing in low risk option trading and technical analysis. Learn much more by visiting http://www.swingtraderstrategy.com
Popular Option Trading Strategies: Profit in bull and bear market directions
