How You Can Use Options to Your Benefit

Todd MitchellProfit can be found in options in a variety of ways from a rise or fall in the underlying market. The most basic strategies employ put and call options as a low capital means of garnering a profit on market movement. Options can also be used as insurance policies in a wide variety of trading scenarios. You probably have insurance on your car or house because it is the responsible and safe thing to do. Options provide the same kind of safety net for trades and investments. They also increase your leverage by enabling you to control the shares of a specific stock without tying up a large amount of capital in your trading account.

The amazing versatility that an option offers in today’s highly volatile markets is welcome relief from the uncertainties of traditional investing practices. Options can be used to offer protection from a decline in the market price of a long underlying stock or an increase in the market price of a short underlying stock. They can enable you to buy a stock at a lower price, sell a stock at a higher price, or create additional income against a long or short stock position. You can also use option strategies to profit from a move in the price of the underlying asset regardless of market direction.

 

There are three general market directions: up, down, and sideways. It is Important to assess potential market movement when you are placing a trade. If the market is going up, you can buy calls, sell puts or buy stocks. Do you have any other available choices? Yes, you can combine long and short options and underlying assets in a wide variety of strategies. These strategies limit your risk while taking advantage of market movement.

 

The following tables show the variety of options strategies that can be applied to profit on market movement:

Bullish Limited Risk Strategies

Bullish Unlimited Risk Strategies

Bearish Limited Risk Strategies

Buy Call
Bull Call Spread
Bull Put Spread

Call Ratio Backspread

Buy Stock
Sell Put
Covered Call

Call Ratio Spread

Buy Put
Bear Put Spread
Bear Call Spread

Put Ratio Backspread

     

Bearish Unlimited Risk Strategies

Neutral Limited Risk Strategies

Neutral Unlimited Risk Strategies

Sell Stock
Sell Call
Covered Put

Put Ratio Spread

Long Straddle
Long Strangle
Long Synthetic Straddle
Put Ratio Spread
Long Butterfly

Long Condor
Long Iron Butterfly

Short Straddle
Short Strangle
Call Ratio Spread

Put Ratio Spread

It is of paramount importance to be creative with your trading. Creativity is rare in the stock and options market. That’s why it’s such a winning tactic. It has the potential to beat the next person down the street. You have a chance to look at different scenarios that they do not have the knowledge to construct. All you need to do is take one step above the next guy for you to start making money. Luckily the next person, typically, does not know how to trade creatively.

About the Author Brian Keith

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