Stock Option Strategies

If you are just making your first steps in investing, trading with stock options is not recommended. However, if you make all the preliminary researches and considerations they can make your investment portfolio more diverse.

Behind the concept of options stays the right of owners to sell or buy securities. This is done at a fixed price and on a predetermined date or before it.

Stock Options Strategies

Once you have acquired an option there are several courses of actions you can take. One of them includes the possibility of implementing the option and your right to buy or sell the securities. Another alternative is the trading of the option you possess.

Next we will examine in more detail the alternative strategies you can use with your options.

1. Call Option in Case of Rising Stock Prices

   As an owner of an option you have the right to exercise the option before it reaches its expiration date.

   Options are beneficial since they allow for the selling or buying of securities no matter what the current market price is. As a result different techniques can be applied to take advantage of this option characteristic.

   For example, if you expect an increase in the price of a stock, you can purchase a call option at a price that is near the current market price. If your expectations are met and the price really increases, you can exercise the option and purchase more shares at the lower price stated at the option contract.

   After this you have several options. One of them is to sell the stock and enjoy the profits. Another alternative is to keep the stock with the accumulated awards.

2. Put Options as a Protection against Losses

   Options are often used as a protection against losses. This is especially true if the owner expects that the price of the stock is about to fall. A useful tool in times of falling stock prices is the put option. It allows investors to protect their assets from the declining prices.

   Under put option you set a price that is at or just below the market price. So, to a great extent you lock the price at this level and if a decline follows, you have the right to sell a stock at the price stated in the put option contract.

   Thus, if the price of the stock really falls, you can exercise the option and sell at the predetermined higher price and enjoy the profits. You can also reduce your cost basis in the stock by selling the put option.

   However, if your expectations of a falling price are not met, you will incur losses equal to the amount of money you have paid for the option.

3. Profit from Stock Options Trading

   Another activity you can apply with options is to trade it, without taking possession of the securities that are included in the contract.

   In order to determine the price of an option many factors and considerations are involved. However, there are two basic aspects involved in option price setting.

   The first one is the fact that the price of the stock option is directly influenced by the price of the stocks that are included in the option. A movement in the price of the underlying securities leads to a movement in the price of the option.

   Another factor that greatly affects the price of the option is the time period until the expiration date. With the nearing of the expiration date, its price tends to fall since it becomes less attractive to investors.

   If you decide to trade with options you should have in mind that this activity holds a high degree of risk.

Finally, options are not recommended as an investment tool to investors that are making their first steps in stock investing. This is so since they have many aspects that require careful study before you embark on their use.

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For knowledge we can highly recommend you subscribe to the The Wall Street Journal.

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