Option Strategies

Option strategies can be utilized in a variety of manners to increase the return you receive from your investments. Many people shy away from options as they can be complex, but often provide good leverage for your investments. Options may also be utilized to hedge your existing positions in order to reduce your potential for loss. There are a variety of these strategies that can be used to improve your return.

Option Strategies

One way to utilize options is through hedging your existing stock positions. Say you purchased a stock and earned a large gain on it. You don’t want to lock in your gains but fear a temporary set back in the stock price and want to protect your position from a decline. One of the option strategies you can utilize involves buying a put option on the stock. This will allow you to profit if the stock market decline on either a macro or micro level. This strategy can also be used to hedge any loss you may have on the existing stock position you are losing money on. Adjusting the quantity of options will either lead to you just reducing your loss or towards improving your overall financial return with a significant gain. Your expectations for the overall market will dictate the amount you should buy.

Another strategy when trading options includes a strategy called entering into a covered call position. This involves selling a call option when you own stock in a company. This allows you to decrease your potential for loss by collecting a premium when you sell the call option to someone who thinks the stock will go up. Since you already own the stock, if the stock goes up you will profit on the increase which will offset the loss on the option increase. If not, then you will at least save money on the decrease in the stock price. This option strategy will however minimize your possible gain though it will limit your losses and earn you a small gain if the stock remains stagnant in price.

You can also simply purchase or sell options as part of simpler option strategies. If you sell options you are betting against another trader’s belief that a stock will increase or decrease a certain amount for a certain predetermined period of time. If you buy options you are betting that a stock will fluctuate in a certain direction. The steeper the price change the more you will profit. The less of an increase, you may lose your option premium purchase price. Leap options can also be purchased as part of a longer term strategy. Leap options are those that are over a year in length.

Option Strategies – The Conclusion

As you have seen there are various option strategies that can be utilized to provide you with enhanced returns. Finding and implementing a strategy involves research and constant monitoring of both the micro and macroeconomic picture and should be utilized by a trader. If these items are followed you option strategies will have a higher likelihood of success.