Stock Option Trading Strategies :

The Four Basic Stock Option Trading Strategies For Mastery

By Billy Williams

Stock option trading offers more flexibility, leverage, and limited risk than any investment vehicle today. At this point in financial history the availiability to access the derivative markets with online option trading now puts the power of these sophisticated instruments in the hands of the trader on Main Street as well as Wall Street. In contrast, the potential of these instruments can also be a little intimidating for some aspiring option traders because some strategies seem so complex.

However, by gaining a foundation in four basic option strategies you can begin mastering the building blocks of all the available strategies that stock options have to offer. The basic strategies are four in number and are the long call strategy, the naked call strategy, the long put strategy, and the naked put strategy. 

Buying a call is the most basic of option strategies and usually constitutes an aspiring trader's first option trade after  gaining some experience buying and selling stock. When you go long a call that means you are bullish on a stock and one call option controls 100 shares of stock. Your risk is limited to the premium that you paid since you cannot lose any more than that by using stock options. Your reward can be unlimited if the stock explodes in value. Time decay works against you in this strategy as the value of the call deteriorates as you approach the expiration date for the call option.

The short call is easy to execute but is a risky strategy given the risk to reward profile which makes this somewhat of an advanced stock option strategy. The strategy is used if you believe that a stock is going to decline or stay at the present value. You implement the strategy by allowing someone to sell a call option to you. Your reward is the value of the premium at the time the call option is sold to you. This lets the seller of the option assign his risk to you while hedging his position.

Time decay works for you as you approach the expiration date for the option you stand to gain more of the premium at assignment. The short call exposes you to uncapped risk if the stock rockets higher in price value and most brokers will not allow you to trade this strategy unless you are very experienced with stock option trading or hold a position in the stock that you are trading this strategy on.

You implement a long put strategy when you are bearish and are looking to exploit a downward directional bias in a stock. You buy a put option which allows you to control 100 shares of a stock and take advantage of the high leverage that put options allow. Theoretically, your reward is almost unlimited with this strategy and your the most you can lose in a worse case scenario is the cost of the put option. This is a bearish directional strategy and time decay works against you so be sure you give yourself enough time to profit with your trading system.

The naked put strategy is implemented when you are bullish on a particular stock or believe that a stock will remain static for a certain amount of time. This strategy allows time decay to work for you and earn income. This is considered an advanced strategy due to the enormous risk if the stock falls in price which exposes you to almost unlimited risk while your reward is limited to the put option premium.

By gaining a deep understanding of these four stock option trading strategies you will have the foundation to having mastery of them for huge returns. You will not only gain mastery over them by trading them effectively as individual strategies but you will begin to understand how to combine them which will let you control your risk while putting yourself in the best possible position for big profits. There are over 70 option strategies to trade for superior returns in today's markets and you learn how to use them all for your advantage but it all starts with these four basic strategies detailed here.

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