Option trading strategies

When it comes to investing, everyone has a different opinion about what is wise, safe, risky and profitable. There is no one right way to invest. As a result many investors are anxious to experiment and dabble in many different kinds of investing strategies in order to get a better feel for how different strategies yield different results and to see if a specific trading strategy meets your expectations of what type of performance you believe your portfolio should have.

Option trading strategies are just more and different methods that you can use with your investment methods. An option strategy is when one or more option positions and possibly underlying stock options are combined. There are many different kinds of options that are present for the option trading strategist. As the investor or buyer, the option trader can buy (for a call option) or sell (for a put option) underlying securities. The investor decision to buy or sell at a specific point of time in the future is called a European Option. To buy or sell an underlying security until a specific time in the future is called an American Option. The fixed price for which it is determined in advance that these securities will be bought and sold for is called the strike price.

Other terms that are associated with option trading strategies are naked calls and naked puts. A naked call increases in value as the underlying stock increases in value, while the naked put increases in value as the underlying stock decreases in value. Investors see an advantage in buying both types of naked options because in doing so no matter what happens in the market, as far as interest rates go, they are benefiting from both decreases and increases in value. The one think to keep in mind is that the stock will loose money if its position remains unchanged in this particular type of option trading strategy. Having the before mentioned strategy of using both naked calls and naked puts is referred to as a "straddle." The straddle strategy is just one of the different option trading strategies that can be used. Generally there are two main strategies that fall under the category of option trading strategies. These are bullish and bearish strategies.

Bullish option trading strategies

All of the option trading strategies that are employed with the theory in mind that the underlying stock price is going to increase is considered a bullish option trading strategy. In this option trading strategy it is vital that the trader or investment holder decides how high an underlying stock can go and how long it will take to see that expected growth happen. Making bullish options is a strategy that is employed by many novice traders because the appeal of a rapidly increasing investment portfolio is certainly encouraging. However with increases in value come increased risk and the wise option trader knows that a spread of bull options is necessary. In a bullish option trading strategy you can make money so long as the underlying stock prices do not go down by the time of the option's expiration date.

Bearish option trading strategies

When the options trader expects the underlying stock price to decrease he employs a bearish option trading strategy. Like the bullish option trading strategy the investor must have an understanding of how and when the stock prices will decline throughout the life of the security. Although there is a cap for profits in a bearish strategy, they cost less to employ. Like the bullish strategies a bear put and spread are common implementation examples. The benefit for bearish option trading strategies is just the opposite form that of a bullish option trading strategy. As long as the underlying stock prices do not go up by the time of the expiration date money can be made.