For most new traders, finding an options trading system that works for them can be confusing. Many of us are familiar with buying or selling stocks, but when it comes to option trading strategies, there are so many more variables that need to be considered.
A simple but potentially very profitable options trading system is to follow the trend of a stock, and buy calls if the trend is up, or puts if the trend is down. But just like anything in today’s economy, nothing can be predicted with perfect accuracy. When you decide to start options trading, it’s important to learn all the strategies and become familiar with them before you risk your money in the market.
Options Trading System – The Long Call
A long call is the basis of many option trading strategies. Buying a call option gives you the right, but are not obligated, to purchase 100 shares of stock from the seller. You have this right only for specified length of time, and you pay a premium for the rights to own the option.
The longer the time to expiry, the higher the premium you you pay. But for new traders, buying a call as part of their options trading system is a relatively low risk strategy that offers the potential for leveraged profits, with the premium you paid the most you can lose.
Another Call Option Strategy – Selling Instead Of Buying
Since over 90% of bought options expire worthless, another strategy used by professional options traders is SELLING call options in a downtrend. You can either sell naked (unhedged) or covered (using a spread).
The ideal time to use this type of options trading system is as near as possible to the top of counter-trend rallies. You’ll get the biggest premiums there from bullish traders expecting the rally to continue, and the fastest price decay as the downtrend resumes, so you can buy back the position and lock in your profits. This is a VERY good strategy if you use it in a down-trending market.
Options Trading System – The Short Or Written Call
Writing call option involves selling right to buy 100 shares of stock from you at a specified price within a specified time frame. However, selling a call option does not obligate the buyer to buy the shares from you. When deciding to use this option is best to use a hedging strategy. A good example of the of a hedged strategy is the covered call.
The covered call strategy is where you to write a call option against a parcel of shares you own. You receive a premium when you sell call options against the stock, and if the stock price rises through the strike price, you are obligated to sell your shares to the option buyer. Writing covered call options is a good strategy for generating monthly income. When done correctly, this can be a very profitable options trading system that is easy to learn and implement.
Options Trading System – The Long Put
Buying a put option is the opposite of buying a call option. Owning a long put option gives you the right, but not the obligation, to sell one hundred shares of a security options to an investor at a specified price, within a certain time period. Buying puts and calls are a simple way to benefit from the movement of an underlying security, and form part of the options trading system most traders use.
The biggest difference between a call option and put option is that with a put option you have a limited profit potential, since a stock can only go down to zero. You should only use the long put option when you believe the stock price is going to go down before the contract expires.
Another Put Option Strategy – Selling Instead Of Buying
As I said earlier, over 90% of bought options expire worthless. Knowing this, professional options traders also sell PUT options in persistent UP-trends.
The ideal time to use this strategy is as near as possible to the bottom of counter-trend pull-back. You’ll get the biggest premiums from bearish traders expecting the downtrend to continue, and the fastest price decay as the rally resumes. This is a VERY good strategy if you use it during market rallies.
There are literally dozens of strategies you can take advantage of, and over time you should make an effort to learn and understand them so you can develop a profitable options trading system of your own.