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Options Trading Strategy
Profits from trading options are directly related to a well thought out and executed options trading strategy. Whether this is a short options trading strategy when selling options or the use of long options trading to enhance profits on a stock that you own, sound analysis and careful attention to market sentiment are critical. Here are a few thoughts about which options trading strategy to use and when.
Short Options Trading Strategy
A short options trading strategy is required when you execute sell a call option. You are contracting to sell a stock at a set price, the strike price of the contract, if the buyer so chooses. You do not own the stock and your analysis tells you that the stock is not likely to go up in value. If the stock does not go up and the buyer does not exercise the option then you gain the value of the premium on the option. If the stock does go up in price you will lose the difference between the strike price when the option contract was made and the spot price when the option is exercised. The appropriate options trading strategy for short option selling is to be very conservative and only enter into trades in which you are very certain to make a profit. This is the world of the famous baseball pitcher, Satchel Paige, who was criticized for holding the baseball for a long time before throwing it. The hitter cannot hit the ball if it is in my hand, he is said to have commented. Likewise, you will not lose money selling options if you avoid any and all situations in which your analysis does clearly predict a profit.
There is no risk of buying short with options. In fact, buying options on a stock instead of buying the stock can help you limit your risk and provide a nice degree of investment leverage. If, for example, you purchase 100 shares of XYZ Corp at $100 a share you pay $10,000 plus fees and commissions. The stock goes up to $110 a share and you sell for $11,000 earning $1,000 minus fees and commissions. Without the overhead of investing this is a 10% return on invested capital. If, however,