Understanding Options Trading Strategies

Whether your goal is to enhance income or manage risk, understanding how options trading strategies are executed based on investment goals, market sentiment and other methodologies can certainly help you meet those objectives. Options can help you identify the risk you take in a position. This risk depends on time value, volatility and strike selection. Furthermore, it can be used to hedge a current position, predict the direction of volatility, or start off a directional play.

. Bull Call Spread: In this spread, you purchase a call on the fundamental asset while selling a call simultaneously on the similar fundamental asset with the similar expiration date at a greater strike price. You must use this strategy when you think the market is more likely to rise than fall

. Bear Put Spread: In this spread, you purchase a put on a fundamental asset while selling a put on the similar fundamental asset with the similar expiration date at a lower strike price. You must use this strategy when you feel the market is more likely to fall than rise since you are capitalizing on a decline in the price of the fundamental asset.

. Covered Call: In this strategy, you can buy the assets outright and also sell a call option simultaneously on those similar assets. You can use this position when you have a neutral opinion and a short term position on the assets, and are also seeking additional profits. However, your volume of assets owned must be tantamount to the number of fundamental assets underlying your call option.

. Time/Calendar Spread: In this, you set your position by entering a short and long term position at the same time on the similar fundamental asset, but with varied delivery months. The point of this type of strategy is time decay- the more further you go in time, the more volatility you buy in this spread.

Options trading strategies can certainly be excellent tools for both risk management and position trading if you use them in a proper way!

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