The most basic option strategies involve buying calls or puts, depending on your market view.
When you are very bullish on the market, you can buy calls to profit from an upward movement that occurs while you own the option.
A call is the right, but not the obligation, to purchase an asset at a specific price (the strike price), on or before a specific date (the expiration date).
The person who sold you the option actually holds the underlying asset, so they would absorb the rest of the loss.
When we purchase calls, we generally purchase them at-the- money or in-the-money, because it lowers our risk of losing the premium. Although out-of-the-money options are much cheaper and provide greater leverage, there is a greater risk of loss. We generally buy them several months out to provide enough time for the market to make the anticipated move.
Options are not like stocks where you buy them and hold them. Decay will continually erode your position and a change in trend can evaporate your profits quickly. It is important to set a specific target price for the option when you initiate the position. When we reach our target, we sell and take our profits. Beware that greed can be a strong motivator and make you want to increase your price target as it is rising. However, doing that can sometimes turn a winning position into a losing position.
It is important to analyze your expectations for the underlying asset and for the market before selecting your strategy.
When you are analyzing potential option positions, it helps to have a computer program like Option-Aid that swiftly calculates volatility impacts, probabilities, statistics, and other parameters of interest. These programs can pay for themselves with the first trade that they help you with.
source: www.mindxpansion.com
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