Option Strategies

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Option rookies are often eager to begin trading — too eager. Each is less risky than owning stock. Most involve limited risk. For investors not familiar with options lingo read our beginners options terms and intermediate options terms posts. Using stock you already own or buy new sharesyou sell someone else a call option that grants the buyer the right to buy your stock at a specified price. That limits profit potential. You collect a cash premium that is yours to keep, no matter what else happens.

That cash reduces your cost. Thus, if the stock declines in price, you may incur a loss, but you are better off than if you simply owned the shares. Cash-secured naked put writing. Sell a put option on a stock you want to own, choosing a strike price that represents the price you are willing to pay for stock. You collect a cash premium in return for accepting an obligation to buy stock by paying the strike price.

A collar is a covered call position, with the addition of a put. The put acts as an insurance policy and limit losses to a minimal but adjustable amount. New option trading strategies example purchase of one call option, and the sale of another. Or the purchase of one put option, and the sale of another.

Both options have the same expiration. Thus, the higher priced option is sold, and a less expensive, further out new option trading strategies example the money option is bought. This strategy has a market bias call spread is bearish and put spread is bullish with limited profits and limited losses.

A position that consists of one call credit spread and one put new option trading strategies example spread. Again, gains and losses are limited.

Diagonal or double diagonal spread. These are spreads in which the options have different strike prices and different expiration dates. The option bought expires later than the option sold 2. The option bought is further out of the money than the option sold.

The likelihood of consistently making money when buying options is small, and I cannot recommend that strategy. Enter your email address.

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