Options Trading Strategies For Dummies
There are many options trading strategies that can be used to make profits in the stock market
, but it is not possible without understanding basic options trading concepts. The idea behind trading options is similar to trading stock, with a few inherent differences that need to be comprehended before jumping into a trade with real money.
Here are some options trading concepts that must be digested:
1. Unlike stocks, which are sold by individual shares, options are sold by contracts. Each contract controls 100 shares of a company's stock. A person who buys five contracts controls 500 shares of stock.
2. Unlike stocks, which may be sold at any price, options are sold at established prices known as the strike price. You would not be able to buy a call option on XYZ stock for $10.73, but you could buy the option at the $10 or $12.50 strike price.
3. Unlike stocks, which may be held until sold or until the company goes out of business, an option has an expiration date. This is a predetermined time at which the option becomes worthless. The expiration date is one of the most misunderstood options trading concept and can keep newcomers out of the options market.
Trading options is embraced by many investors who understand the variety of option trading strategies that can be used regardless of the current market conditions. There are option trading strategies for bear markets, when stocks are generally going down. There are additional option trading strategies for bull markets, when stocks are increasing in value, and neutral markets, when stocks are pretty much stuck in the mud.
When market conditions are bullish a trader will want to use a strategy that will reward them when the stocks go up in price. Most of the time these revolve around a call option, which gain value when the stock's price rises. Among the bullish strategies commonly used by options traders are buying call options, selling naked puts, buying protective puts, using bull call spreads, using bull put spreads and writing covered calls. (Most investors prefer to use bull put spreads rather than bull call spreads because they collect a premium to begin the trade.)
When market conditions are bearish, most trading strategies revolve around buying puts, which appreciate in value when the stock price goes down. Among the bearish strategies commonly used are buying puts, naked calls, bear put spreads and bear call spreads. (Most investors prefer to use bear call spreads rather than bear put spreads because they collect a premium to being the trade.)
Options trading concepts aren't difficult to understand, but they are different and require a studious approach. Above all, options trading strategies should be practiced repeatedly through non-funded trades and implemented with real money only when completely mastered. Many veteran instructors recommend that new options traders complete ten consecutive successful trades before they enter funded trades.
by: Matt kaldor
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