Basic Options Trading Strategies

Basic Options Trading Strategies

In options trading, there is an option on a security, valued at a specific strike price, which allows for an exercise of a right. In plain English, an option gives the owner the right, but not necessarily the obligation, to purchase or sell an underlying instrument or asset at a certain strike price within a set period, as determined by the owner. When an investor holds an options contract, he can either buy it at its strike price or sell it before it expires, and thus control the outcome of his investment. A call option, for instance, gives the buyer the right to purchase an underlying spot contract at the strike price at any time before it expires, while a put option gives the buyer the right to sell an underlying spot contract at the strike price at any time before it expires. An investor may sell all or just a portion of his options.

Today, Options trading has become a major source of income for many options brokers and dealers, as well as for some traders who have made money through the exercise of their options. However, options trading has also been a cause of large losses for some novice traders. These unfortunate individuals lose money, not only because they misread the underlying market situations, but also because they fail to make the proper investment choices.

Options trading involves the purchase or sale of one or more particular options on a particular financial instrument, at an agreed upon strike price on or before a certain date. This date is referred to as the expiration date. While some exotic options contracts have a fixed expiration date, others are based on a range of dates. It is important for options traders to understand and determine the market conditions that would affect their investment and thereby the date of their options expiries. Some of the most common exotic options contracts are call and put options.

There are many factors that can affect an options trading contract. Among these factors are speculations on the movement of underlying securities, such as the expectations of a particular company concerning its stock options and the market values of the stock options that it may hold at any given time; changes in the financial value of a company’s stock, including fluctuations in the value of the stock itself; speculations on the economic and social outlook of a country, including its political stability; fluctuations in the rates of interest on loans and other debts of a borrower; and even speculations on the effectiveness of a particular government or political policy. The recent global economic crisis, for instance, has had a profound impact on options trading and the level of income for a small number of investors.

Many new options traders do not realize that they may be involved in options trading even when the market value of an underlying security has actually declined. In this case, a trader may use put options to protect the value of his investment at This protects the trader from a potential loss if the stock or other underlying assets lose value. Put options are similar to call options in that they give the buyer the right but not the obligated to purchase an asset at the strike price, as determined by the buyer, before the expiration of the contract. In options trading, put options are used to give the owner the power to secure his investment without actually purchasing the asset itself.