Profitable Strategies for Trading Options

http://www.options-trading-education.com/24269/profitable-strategies-for-trading-options/ Profitable Strategies for Trading Options By www.Options-Trading-Education.com The point of trading options is to contain risk and leverage trading capital. With these points firmly in mind here are two profitable strategies for trading options. In options trading the buyer of an option pays for the right to buy in the case of a call option or sell in the case of a put option. The price of the sale is set in the contract and will not change no matter how high or low the underlying stock rises or falls. Traders use calls or puts based on whether they believe that the underlying stock will rise or fall. If a trader believes that a stock will rise in price he buys a call option. If he believes that the stock will fall in price he buys a put option. Conversely a trader who believes that a stock will rise may sell puts and if he believes that it will fall he can sell calls. Buying versus Selling When a trader buys a call or put contract he limits his risk to the price paid for the option contract. When a trader sells a call or put contract he is paid for taking on the risk that the price of the underlying stock will change substantially leading to monetary loss. Over the long run those who sell options contracts typically make more money than those who buy. However, there is always the risk of substantial loss so that options sellers are typically limited to investment houses with deep pockets and those who own the stock in question. Cover Calls Selling a covered call option contract can be profitable. A typical scenario is that an investor owns a stock. He is familiar with the channel in which it trades. The stock is nearing the top of that channel. He sells a call option on the stock. He is covered against substantial loss because he already owns the stock. If the stock goes up a lot he misses out on profits but is compensated by the premium paid for the option contract. If he did not own the stock he would need to go into the market and buy it at the now higher price and then sell at the contract price and that could be very costly. Writing covered calls offers a nice way to make a little extra money on top of dividends and appreciation and is one of the profitable strategies for trading options. All about Leverage Let us say that XYC Corp. is trading at $100 a share. Your research tells you that in three months it will probably be selling at $110 a share. You could purchase 100 shares for $10,000, wait three months and hope to gain ten percent on your investment namely $1,000. Or you could buy a call option on XYC Corp. Let’s say that calls for $103 that expire in three months cost $1 a share. You could purchase a call option for 100 shares and pay $300. In three months the stock goes to $110 a share. Your option contract is now worth $7 share or $700 for a block of 100 shares. In the first case your return on investment is 10%. In the second case it is 233%. This is an example of the leverage of trading options and one of the profitable strategies for trading options. http://youtu.be/1f_SyU2sm3w

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