In today's markets, it is lmost impossible to find any investment th t offers more flexibility, leverage, and l mited risk than stock option trading. Esp cially at this time in history w th online option trading which puts the p wer of these sophisticated investments at the d sposal of both the aspiring trader as w ll as the veteran trader? Unfortunately, the str ngths of these investments are also the b ggest obstacles to mastery for most tr ders as some strategies become seemingly to c mplex to master by most would-be ption traders. However, by understanding the f ur basic stock option trading strategies you can c nstruct a foundation for trading mastery w th stock options. The four basic str tegies you must understand are the l ng call, the short call, the l ng put, and the short put.
A c ll option, or long call option str tegy, is a bullish strategy that a ption trader uses when he sees an pward bias in a company's stock. One c ll option allows you to control up to 100 sh res of the company's stock and y ur reward potential is theoretically unlimited. His r sk is limited to the price of the c ll option he purchased though however an ption trader must factor time into his nvestment decision because time decay works gainst his position as the expiration d te for his call option approaches.
The sh rt call is easy to execute but is a r sky strategy given the risk to r ward profile which makes this somewhat of an dvanced stock option strategy. The strategy is sed if you believe that a st ck is going to decline or st y at the present value. You mplement the strategy by allowing someone to s ll a call option to you. Y ur reward is the value of the pr mium at the time the call ption is sold to you. This l ts the seller of the option ssign his risk to you while h dging his position. Time decay works for you as you pproach the expiration date for the ption you stand to gain more of the pr mium at assignment. The short call xposes you to uncapped risk if the st ck rockets higher in price value and m st brokers will not allow you to tr de this strategy unless you are v ry experienced with stock option trading or h ld a position in the stock th t you are trading this strategy on.
The l ng put strategy is the inverse of the l ng call strategy where you are l oking for the stock to decline r ther than rally. When you buy a put ption you control 100 shares of st ck in a company and lets you t ke advantage of enormous leverage. Your r ward potential is theoretically unlimited while y ur risk is limited to the c st of the put option. You m st be sure to give yourself nough time to profit with your tr ding method because time decay works gainst you with this strategy.
The naked put str tegy is implemented when you are b llish on a particular stock or b lieve that a stock will remain st tic for a certain amount of t me. This strategy allows time decay to w rk for you and earn income. Th s is considered an advanced strategy due to the normous risk if the stock falls in pr ce which exposes you to almost nlimited risk while your reward is l mited to the put option premium.
There are ver 60 option strategies to trade for h ge returns in today's markets and how you use th m can be for your advantage but it all st rts with these four basic strategies d tailed here. By taking the time to see how ach of these strategies work in the m rket individually you will begin to nderstand how they work in combination w th each other. Soon, you gain m stery of stock option trading and how th y are implemented to put you in the b st position to profit while limiting y ur risk.
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