Stock Market Option Strategies Explained

People who engage in stock market trading know it requires a lot of their time and attention

. This is never truer than when options are part of the portfolio. These are tricky because they pertain to the opportunity to purchase or sell shares of stocks, not actual ownership of these shares. Successful investing requires the knowledge and use of one or more option trading strategies.

Prior to being able to employ option trading strategies, an investor should be aware of how options differ from a similar investment called futures. These items have a few things in common, primarily that they both represent leveraged derivative investments and are used to provide a hedge against possible risk. Futures and options each involve a written agreement between a purchaser and seller of an underlying asset, the stocks themselves. The agreement stipulates that the shares can be purchased for a specific price on a certain predetermined date. Both options and futures have option trading strategies.

The differences begin at this point and one pertains to the fact that the purchaser of a futures contract is required to pay a portion of the agreed-upon price at the time the futures contract is purchased. This can be equated to the act of making a down payment. In the case of option trading strategies, the purchaser pays a premium fee when the options are purchased. A party involved in purchasing or selling a futures contract must fulfill his or her obligations when the contract expires. Those who purchase options contracts do not have to exercise their right to purchase the stocks. There are option trading strategies for both options and futures.

In terms of option trading strategies, options investors can profit when the prices move up, down, or even sideways. Covered call strategies fall at the conservative end of the strategy spectrum. An earnings strategy involves tracking earnings using charts and determining parameters for investments that will be profitable. A naked calls strategy is used by advanced traders, providing them with the ability to make profits using information from earnings announcements and by engaging in complex techniques.

Option trading strategies such as these are used every day by investors who deal in options. Having a strategy helps them to simplify their investment decisions and be more effective. They soon find the strategy, or combination of several, that works best for them in terms of generating profits.

by: Alex D. Richards

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