Basic Option Trading Strategies

Trading options can be a way to stabilize your earnings from stock purchases and help you build your profits in a more controlled manner. When you purchase a stock option, you are buying the opportunity to purchase a specific stock at a specific price on a specific date. If the price of the stock goes up, you will be able to buy it at the agreed upon price and then sell it on the open market for a profit. If the price goes down, you can opt to let the agreed upon purchase time expire without purchasing the stock for a loss. Option trading strategies range from very aggressive to very conservative, depending on your personal trading style.

Bullish Trading

Bullish stock option trading strategies are designed to take advantage of rising stock prices. The long call stock option trading strategy is a straightforward option purchase. The only risk in a long call option is the amount of money you pay for the option itself. In a rallying market, long call options can make quite a big profit when stocks rise in price. A short put trade is a riskier way to take advantage of a rising market. In a short put strategy you offer to buy a stock if it falls to a specific price by a specific date.

Bearish Trading

Bearish stock option trading strategies are employed when you feel that the stock market is going to go down instead of rise. The short call option is simply selling a call at an established price. This strategy is profitable when the stock’s price continues to fall below the option price. A long put strategy can decrease your amount of risk in a falling stock market. It is basically the same as a long call option, but it is made with the expectation that the stock will fall in price rather than rise.

Neutral Trading

When the market is fluctuating, it may be a good time to use some neutral trading strategies. The long straddle strategy involves purchasing a put option and a call option at the same strike price. That way you have the option for unlimited gains if the market rises, but your losses are limited if the market falls. A short straddle is when you short one put option and short one call option at the same strike price. In this scenario you could incur an unlimited amount of loss, but you will maintain a profit margin if the stocks remain stable.