Option Trading Strategies

Different option trading strategies can help you make money in any market environment. You simply have to determine what the market or stock is doing and choose your arsenal (calls, puts, butterfly, condor, etc.).

For the traders that know about options please view my page on various option trading strategies.

When I was starting out, options gave me a hell of a time. I picked up a book on the topic and did not even know what being short meant. Needless to say I had a tough time and did not finish reading it.

Options confuse alot of people. They can be complicated but they can also be quite easy and very profitable. Aside from the concept of options, option trading strategies themselves can be complicated.

Options are probably the single fastest way to make or lose money on the planet, period. You can make 1000% in a day or you can lose everything (or more).



To begin, an option is exactly that, an option to do something. In real estate you can buy an option. For example if you see a home that is selling for a good price ($100,000) and you know somebody willing to buy it for even more ($110,000) but you don't have the money to buy the house yourself and sell it, you use an option.

You would go to the owner of the home and tell him you will pay him $1,000 for the option to buy his home within the next 30 days for his asking price ($100,000). You pay him the $1,000 and line up your friend who will buy it for ($110,000).

You have now locked in the ability to purchase the home for a fixed price (although you have payed a small fee for this luxury) but you know that you have a guaranteed period of time in which you can buy this home.

Now translate that situation to stocks. In stock options you have two basic vehicles: a "call", and a "put". If you buy 1 "call option" you have purchased (for a small premium) the right but not the obligation to purchase 100 shares of the underlying stock at a specific amount for a specific period of time.

For example: I think Google is going higher this month. It is currently at $500/share. Now choose among the option trading strategies (here we will just buy a call option). I will buy 1 $500 Google August Call option. If the option is selling for $12.00 then I am investing $12.00 for the right to buy 100 shares of Google stock until the third Friday in August (yes it is always the third friday of the expiration month).

So, if Google stock goes to $600/share at the end of July I can exercise the option by buying 100 shares of Google @ $500 (this will cost me $50,000) and immediately sell it at the market price of $600 (netting me a profit of $9,988 after deducting the $12.00 I paid for the option).

What was my risk? Only the $12.00 could have been lost even if Google went backrupt and the stock went to $0.00.



A put option is exactly the opposite. A put option give you the right but not the obligation to sell 100 shares of the underlying stock at a specific price within a specific period of time.

Options trading strategies can get extremely complicated as well. There are huge option trading firms that only hire PhDs from MIT to crunch option pricing algorithms...taking advantage of small pricing discrepancies.

The Black-Scholes option pricing model has been the standard for many years. If you want to see how complex option pricing can get feel free to google it and take a look...no need to explore it here.

To break it down to the lowest common denominator: Options are highly levered ways of playing a stock to the upside or the downside. There is also definable risk with a maximum loss (the cost of buying the option). The previous sentance is true when you buy or sell puts or calls. Selling puts or calls can theoretically have unlimited risk.

Different option trading strategies can change how you approach a stock by deciding if it is going to be really volatile or not as well.