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Stock Option Trading Strategies

Posted on August 15, 2010
Filed Under Investing and Speculating, Options Trading | 1 Comment

If you’ve taken care of your safe, secure investments, and would like to allocate a portion of your nest egg to speculating, you’ll be interested to learn more about option trading.  Keeping in mind that speculating is a nice way of saying gambling, go ahead and plunge into reading this article about option trading.  Option trading is a way for informed investors to control more share of stock while using less capital to do so. Basically, options are a contract between a buyer and seller. The buyer having the right to buy a certain number of stocks, at a predetermined price, by the expiration date of the option. Traders use these speculative instruments in a number of strategies.


Options can be used in number of ways, and some can be covered or naked. Uncovered, or naked, options can pose a much higher risk. Because this risk can be unlimited in certain situations, investors have to be approved by their investment firm or broker in order to trade options. Some of the most basic stock option trading strategies include buying or selling calls or puts. Calls give the buyer the right to buy stock, and the seller is obligated to sell if that’s what the buyer decides to do. Puts give the buyer the right to sell the stock, and the seller is obligated to buy. The investor that buys a call believes that the price of the stock is going up over the strike price. Then, they can buy it at the lower price, and sell it for the higher market price. The seller of the call is either going to choose a strike price above the price they bought the stock for and sell the stock for a profit, or hope that the price of the stock doesn’t exceed the strike price so that they can simply keep the money they received from selling a call option. Puts work in a similar fashion, but in the opposite direction.

There are many more strategies involved in option trading. In a diversified portfolio, options certainly have their place. It is important to be informed of the strategies and risks before incorporating any new investment into an overall financial plan.

Comments

One Response to “Stock Option Trading Strategies”

  1. George on August 15th, 2010 10:23 pm

    Hello option trading guys,
    I just had an educative experience, simulating in real time on this option software and I’m feeling lot more comfortable trading options.
    Free Option Software
    It’s FREE (can’t believe it, but its true).
    George

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