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There are many different options trading strategies documented that fit a wide range of investment styles and skill levels. If you normally buy stocks online as a trader to make money – you may want to consider investigating trading options. Depending on your options trading strategy, you could use options to hedge (i.e. Covered Call) against your current stock positions. You could also decide to trade option contracts to take advantage of their high volatility to profit from stock price movements. Regardless of your investment goals – there may be an option trading strategy that fits your needs!

Before learning about advanced options trading strategies, you first need to understand the basics. Options come is two forms – Calls and Puts. You can buy or sell calls as well as buy or sell puts. Here is a breakdown of the basics in trading an option.

Call Options
Call options give the buyer of the contract(s) the right (but not obligation) to purchase a stock at the strike price on or before the expiration date. These option contracts vary in expiration dates as well as strike prices depending on the underlying asset.

• Purchasing a Call – When you purchase a call option, you have the right but not the obligation to purchase the underlying stock at the strike price on or before the options expiration date. When a call option is purchased – the buyer is predicting the stock will rise and is a sign of bullish activity. Buying calls has a minimum risk of the premium paid for the contract and an unlimited reward.
• Selling a Call – When you sell a call option, you may be required to buy the asset and deliver it to the buyer if they call the option. When a call option is sold – the seller is predicting the stock will decrease and is a sign of bearish activity. Selling calls has an unlimited risk and a reward limited to the premium received for the sale.

Put Options
Put options give the buyer of the contract(s) the right (but not the obligation) to sell a stock at the strike price on or before the expiration date. These contracts can vary in strike price and expiration date depending on the underlying stock. While buying and selling put options is not as popular as calls, these types of trades can be an effective options trading strategy that will make you money.

• Purchasing a Put – When you purchase a put option, you have the right (but not the obligation) to sell the asset at the strike price on or before the expiration date. When a put option is purchased – the buyer is predicting the stock price will decrease and is a bearish sign. Purchasing puts has a risk limited to the premium paid. The reward is unlimited up to the strike price minus the premium paid.
• Selling a Put – When you sell a put option, you may be required to sell the asset to the buyer of the contract. When a put option is sold – the seller is predicting the stock will increase and is a sign of bullish activity. Selling puts has a risk that is limited to the strike price less the premium paid. The reward is limited to the premium received for the contract.

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Tags: Options Trading Strategies