About Options Trading Strategies Module
Stock option strategies allow a player to maximize the potential reward while minimizing the associated risk. Option players often use this strategy to leverage their investment potentials. Option investing may be used to take advantage of stock market opportunities and fluctuations in stock prices. Option playing is not for everyone, because options are referred to as wasting assets. This means that unless the price of the option purchased moves in the anticipated direction, the value of that option will continue to decline with time, as the option expiration approaches.
Other People Are Reading
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What Is Options Trading
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Options trading is a form of investment speculation. It is not typically an investment in the true meaning of that word. While chances are that the option buyer may make money from such investment, most options players lose money from their options portfolio. Options is a type of trading strategy focusing on derivatives. There are many forms of options. Option pricing uses a pricing model developed by Black Scholes and Robert Merton, Nobel Peace winners in Economics.
History of Options Trading
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Option trading originated in the Chicago Board Options Exchange (CBOE). The first known options contract was offered for trading April 26, 1973, at the CBOE. On that day alone according to CBOE, 911 option contracts were traded. Over the years options trading has spread to many other global derivatives markets including New York, London, and Tokyo.
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Call Option Strategy
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There are many kinds of option instruments traded in the markets and the two most common are called the call and the put.
The call option is a strategy betting that a stock price is worth more than the current strike price of that particular option.The strike price marks the the point at which you make or lose money on that particular option trade depending on if the price of the option is above or below that strike price. An option investor makes money if that option is trading above the strike price at expiration, and would lose money if the option is trading below the strike price when the option expires.
Put Option Strategy
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The put option is the opposite of the call option strategy. The put option strategy bets that the stock price of that option is worth less than its current strike price. Put option buyers typically expect the price of the stock on which they are buying the option to go down in value. They are anticipating a decline in the stock price.
Naked Put Strategy
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This is a strategy often used by swing option players. The naked put option player expects the value of the fundamental stock price to increase in value. This option strategy is a little more complicated and is not recommended for new option buyers. Often naked option players are required to have minimum deposits in their options trading accounts because, as much as profit potentials exist for making money from the naked put strategy, losses can add up significantly, and unexpected margin calls may be generated, requiring the naked put writer to deposit additional money into his stock trading accounts.
Option Spreads
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Option spread strategies may be used in trading assets such as stocks, bonds, or futures and derivatives. Spread trading is more complex strategy which requires lots of experience. One example of a spread option play is the vertical spread. This strategy implies buying and selling two different option instruments such as a put or a call with differences in strike prices, which may share the same expiration dates. The importance of spread strategy is derived from the ability of the purchaser to limit assumed risks.
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