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Stockoptions | Trade Stockoptions |
Option Trading | Investing in stock options
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Stock Options Strategies
An option strategy is
usually implemented by combining one or more option positions and zero
or more underlying positions. The option positions used can be long
and/or short positions in calls and/or puts at various strikes.
Generally, options trading strategies can classified to be bullish,
bearish or neutral. In the case of neutral strategies, they can be
further classified into those that are bullish on volatility and those
that are bearish on volatility.
Bullish
Strategies |
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Bullish
options strategies are employed when the options trader
expects the underlying stock price to move upwards. It is necessary to
assess how high the stock price can go and the timeframe in which the
rally will occur in order to select the optimum trading strategy.
The most bullish of options trading strategies is the simple call
buying strategy used by most novice options traders.
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In most cases, stocks seldom go up by
leaps and bounds. Moderately bullish options trader usually set a
target price for the bull run and utilize bull spreads to reduce risk.
While maximum profit is capped for these strategies, they usually cost
less to employ. The bull call spread and the bull put spread are
common examples of moderately bullish strategies.
Mildly bullish trading strategies are
options strategies that make
money as long as the underlying stock price do not go down on options
expiration date. These strategies usually provide a small downside
protection as well. Writing out-of-the-money covered calls is a good
example of such a strategy.
Bearish Strategies
Bearish options strategies are employed when the options trader
expects the underlying stock price to move downwards. It is necessary
to assess how low the stock price can go and the timeframe in which
the decline will happen in order to select the optimum trading
strategy.
The most bearish of options trading strategies is the simple put
buying strategy utilized by most novice options traders.
In most cases, stock price seldom make steep downward moves.
Moderately bearish options traders usually set a target price for the
expected decline and utilize bear spreads to reduce risk. While
maximum profit is capped for these strategies, they usually cost less
to employ. The bear call spread and the bear put spread are common
examples of moderately bearish strategies.
Mildly bearish trading strategies are options strategies that make
money as long as the underlying stock price do not go up on options
expiration date. These strategies usually provide a small upside
protection as well. A good example of such a strategy is to write of
out-of-the-money naked calls. |
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Sources: Wikipedia, FCIC, SEC and other public sources.
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