Stock market investors frequently use stock options as an investment vehicle. Since they derive their value from a stock’s valuation, they are derivatives. An option that has been sold becomes a contract involving the seller, also called the writer, and the buyer. The buyer, if he chooses, may either buy the stock from, or sell the stock to the seller. Here are some important facts about stock options and option trading strategies.
Security trading strategies are approaches to investment management that translate predictions about market direction into actual buying or selling of securities. Someone who thinks that a stock is going to go up in value is said to be bullish on the stock and would tend to take long positions, i. E., positions that will pay off if it goes up. If a person thinks that a stock will go down, they are said to be bearish. They will probably take short positions on it, ones that will reward decreases in its price.
A call option is a derivative that grants the buyer the right to buy a specific stock at a specific price called the strike price. The buyer pays a fee for this right. It is in effect for a specific time period and can generally be exercised at any time during that period.
If a person is bullish on a stock, then it would be reasonable for them to buy a call for that stock. A bull would expect the value of the stock to rise above the strike price before the option expires. By exercising the call, they will be able to buy the stock at a discount.
A bear would probably want to sell calls instead of buying them. If they are correct and the stock’s price declines, they are ahead by the premium on the call, since it would not be used in that situation. A naked call occurs when the seller of the call is not an owner of the stock. This is a high risk position. The seller may have to buy the stock if it goes up, and there is no limit to how high it can go.
Put options are complementary to call options. A put grants the put buyer the right to sell a given stock to the put seller at a fixed price during a specific time period. Bulls sell puts and bears buy them.
These strategies are just the beginning. There are variations and issues that are not discussed here. The trader always tries to buy low and sell high. Translated to options, bulls expect increasing prices and bears expect decreasing prices. The hard part is estimating the future path of a stock’s market price. Guessing this should lead to selecting one of several appropriate option trading strategies.
Understanding the best option trading strategies or best ways to write call options together with option trading strategies