Be the first to like this
Options Trading Strategies
Options trading strategies vary according to the skill set and risk tolerance of the trader or investor.
Those who buy options to hedge risk will take a different approach from a speculator who follows trends or trades in an established channel.
Investors, day traders, and companies buying and selling commodities or various products internationally
all develop options trading strategies suitable to their expertise
and desire to limit risk or garner profits in options trading.
Guaranteeing a Profit and Limiting Loss
A company that mines gold may be concerned about the price of gold bullion in the following two or three years.
They have invested heavily in new mining operations and need gold to remain at its current value or go up in order to make a profit.
A common approach taken by such companies is to sell gold futures on the futures market. Another approach is to buy options on contracts to sell futures.
If the price of gold goes up the company will not execute the options contract
but if gold falls in price the company will execute the contract and sell their production at the contract price
instead of the now-lower price of gold bullion.
Likewise companies that buy and sell products and services internationally
will use options trading strategies in order to hedge currency risk in payment.
In each case hedging risk with options is a useful strategy.
Stock Profits with Options
Long options trading can be profitable for stock owners.
Being long in a stock means that you own the stock.
Savvy investors often stocks who value fluctuates up and down in a channel.
When the stock is approaching the top of the channel the long term investor
may feel secure that the stock will not break out but will rather pause or even fall a bit.
This investor can profit from selling calls on his stock.
He will receive a payment for selling the call contract and, if his analysis is correct,
will not need to sell his stock as it will not go up appreciably in price.
Often times a stock owner can add the periodic selling of a call option to his dividend payments
to increase the income he receives from his stock.
The worst case in this scenario is that the stock goes up in price and the buyer executes the contract.
The former stock owner misses out on a bump up in the stock
but still gains the payment for the options contract and never loses money in the bargain.
Following the Market in Search of Profits
Many traders use options because of the investment leverage they provide
and because they allow the trader limit his investment risk.
These traders engage in a wide range of day trading and longer term options trading strategies in search of profits.
They seldom execute an options contract but rather enter and exit trades in the most profitable manner.