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Basic options strategies
In trading options, a trader seeks to anticipate price changes of underlying stocks, commodities, or currency pairs. He or she buys or sells options contracts with the expectation of profit. In doing so the trader uses any of several basic options strategies. In trading options the buyer can purchase a call contract. In doing so he pays for the right to purchase a given stock, commodity, or currency at a set price. This is called the strike price and it does not change for the duration of the options contract. The trader purchases a call on an equity which he believes will rise in price. When this happens he can execute the contract and buy the stock for less that its current value. More commonly the options trader simply sells his now-more-valuable call contract and pockets his profit. In purchasing a put a trader pays for the right to sell a stock, commodity, or currency at the strike price not matter how low the price might fall. As with a call, the trader can exit his position by selling the contract, ideally at a profit. Understanding calls and puts is the beginning of understanding basic options strategies for online options trading.
Basic Options Strategies
Profit from basic options strategies rely on the analysis of the equity in question. Traders use both fundamental and technical analysis of stocks, commodities, or currencies as a guide. The key to this process is to recognize the intrinsic value of the equity before its price changes. Traders often do more than buy or sell a put or a call. Here are a few basic options strategies.
Trading Options when One Owns a Stock in Stock Option Trading
A trader who owns a stock may want to buy more but may also be unsure about whether it will rise in price in the near future or not. He can purchase a call and lock in a good price at which to buy should the stock rise in price.
This is one of the more common basic options strategies for owners of rapidly rising stocks. A trader owns a stock that has gone up rapidly. He does not want to exit his position because he believes that the stock still has upside potential. However, he is concerned about a big correction. Thus he buys puts on the stock. This gives him the right to sell at the current price, even if the stock price plummets. A long put is often a sort of insurance that a stock investor purchases.
Trading Options when One Does Not Own a Stock
A short call is perhaps the most commonly use and most basic options strategies. The trader expects a stock to rise in price. He purchases a call on the stock. The stock goes up in price and he sells his contract for a profit. He is under no obligation to do so and only executes the contract when doing so is profitable.
This is one of the basic options strategies for contrarians. When a trader expects a stock to fall in price he can purchase a put.