option corner

Writing Puts - An Introduction

2009-01-13T00:12:00.000-08:00

By Brad Castro

Writing puts can be a great source of income. It can also be a great way to purchase stock at a significant discount. And the best news is that writing puts is a relatively simple process.

How Does It Work?

The official definition of a put option is a contract that gives the holder the right, but not the obligation, to sell 100 shares of a certain stock at a certain price by a certain date.

But a simpler way to think about puts is to consider them basically to be insurance policies. For example, if I own 100 shares of the XYZ Company which trades at $33/share, I can purchase a put option that gives me the right to sell my stock for $30/share anytime up to and before the expiration date of the option. Like all insurance policies, I have to pay a premium, and purchasing a put option is no different.

And why would I want to sell my stock for $30/share when it's trading at $33/share? I wouldn't, of course, but what happens if the share price really tanks? If the stock drops down to $20/share, my put option would give me the ability to sell the stock for $30/share. Sure, I'd be out $3 per share plus the amount I paid for the put, but I wouldn't be down the full $13 per share that I would've had I not purchased the put in the first place.

In short, by buying a put I, in effect, have insured my stock at $30/share.

Become an Insurance Company

Writing puts simply places you on the other side of the trade so that you become the insurance company. When you write, or sell, a put you receive a cash premium in exchange for giving someone else the right (but not the obligation) to sell you their stock at a certain price by a certain date. If the stock stays above that price (called the strike price) you keep the premium and the put expires worthless. Ah, a successful insurance venture.

Of course, the stock might fall below the strike price, so it's always important that you only write puts on stocks that you're willing to own at the strike price selected. And it's also important that you have the necessary funds to purchase the stock in case you're assigned (i.e. the put holder exercises the option).

The Case for Writing Puts

If done properly and intelligently, writing puts has two distinct benefits:

1. Income Generation - As long as the stock remains above the strike price, you can generate a steady stream of income. You can treat the income like a special dividend and spend it, or you can accumulate it and grow your cash reserves so that you're able to write even more puts in the future.

2. Acquiring Discounted Stock - Say a stock you like is trading at $42/share and you think it's already attractively priced and you would be willing to own it yourself if it came down some in price. Let's suppose you wrote a put on it with a $40 strike price and an expiration date one month away for a $2 premium (or $200 in cash since you each contract represents 100 shares of the underlying stock). Think about what you're actually doing--you're getting paid $200 to offer to buy a stock for $2/share less than what it's currently trading at. And if you do get assigned? Factoring in the premium you receive, you don't actually pay $40/share, you pay $38/share.

Conclusion:

Writing puts, like any kind of option trading, is not for everybody. And it's not without risk either. But it may be worth your while to conduct further research to determine if the strategy has a place in your portfolio.

About The Author:

Brad Castro is a practitioner and promoter of Leveraged Investing, or option trading techniques and strategies designed to simulate successful value investing. Leveraged Investing has two objectives: to acquire stock in quality companies as cheaply as possible and then to squeeze more returns from those stocks once they've been acquired. Please visit http://www.great-option-trading-strategies.com for more information.

Article Source: http://EzineArticles.com/?expert=Brad_Castro

How to Invest During a Recession

2009-01-13T00:11:00.000-08:00

By Brad Castro
America is spiraling downward into a recession. Some say we are in the recession now, but that is a matter of opinion really. So what are we supposed to do during this economic downturn. Many of us invest for a living and need to find good opportunities for investing to continue making an income. Luckily, in every situation, there is always a method of investing that is both safe and profitable. It just so happens to be in my area of expertize, penny stocks.

Why penny stocks? You see, during this recession, you are going to see tons of really big companies do really bad. The little companies on the other hand are still under the radar and will not suffer as badly because of our economic situation. In fact, many of them will gain a ton of momentum because of it! Because of my involvement with penny stocks, I have been able to keep investing with little worry of failure. You will not see me turning in dozens of applications during this recession.

So how do I do it? There a couple little tricks I use to find penny stocks that are still safe investments. The first of which is trend investing. I simply look at a stock prices history and identify a trend. A trend is any repeating pattern in the stock price that you can use to predict the price's future. If the trend is unaffected by the recent stock market problems, it is a safe investment. It is just a little method I have developed recently and it has been working wonders!

The second thing I look at is actual trade volume. If a stock maintains it's trade volume, even through all of this mess, it will make a good investment. So you see, you can still invest during a recession. You just have to change it up a little.

It is during times like this that resourceful people who take the time to adapt to there situation make the really big bucks that can be made in investing. Sure, anyone can make a few bucks when times are good, but now is when we will see who is going to be the next big investor that everyone looks up to!

If you need more help or want more advice, you can find one of my favorite tools I use all the time to invest in penny stocks here: Doubling Stocks. I use this tool in just about every investment I make and highly recommend it. Thank you for reading and good luck investing!

Article Source: http://EzineArticles.com/?expert=Michael_Pergrem

How to Find Undervalued Stocks That Will Double in Value

2009-01-13T00:08:00.000-08:00

By Tommie Taldavas

With the current economy, so many people are fearful to invest in the stock market right now. Do they not know that the best time to invest is now? Never has the price per share been lower in many of the blue chip companies. It has been so hard to get into them before, but now the playing field is more level. The biggest problem is that many people are scared to invest because they do not know what to invest in. They do not know how to find undervalued stocks that will earn very good profits.

So, what is an undervalued stock? It is a stock that is priced well below of where it is valued. It is a stock that is considered to be "on sale". In some cases, you may be able to find stocks that are priced 50% lower than where they are valued.

So, how do you find undervalued stocks? One way to search for an undervalued stock is to analyze the price per earnings and earnings per share of the companies that you are interested in. There is really no clear formula on determining if a stock is under priced. It just takes lots of practice and skill at analyzing the historical data of a stock. History always tends to repeat itself. So, our greatest indicator about what a stock will do in the future is to review its history.

The time to get started investing is now. You can leverage the power of the stock market to really earn some money.

So, how much do you want to make this year?

Find Undervalued Stocks is an great site for learning how to select undervalued stocks that will give you a huge profit margin.

We have been following their recommendations and really happy with our results.

Article Source: http://EzineArticles.com/?expert=Tommie_Taldavas

Stock Market Strategies - Why It's Worth Your Time to Research

2009-01-13T00:06:00.001-08:00

By Perry Webbing

As we all know by now, the stock market can be a tricky and finicky entity indeed. Every day, there are fortunes won and lost just by the buying and selling of stocks, and by the success or failure of the businesses behind those stocks.

The people who are going broke in the stock market are usually the ones who are the least educated about it, and think that most of it is based on luck. You cannot just pick whatever company sounds good to you and expect to strike it rich. It doesn't even happen that way in the movies! The people who are making the most through the stock market are the ones who have spent the time, who have put in the research necessary to build winning stock market strategies.

This must take a college degree, or years and years of trial and error, right? Actually you don't have to have any higher education and you don't have to spend half of your life making costly mistakes just to learn the ropes. While you could not just come in off the street and expect to become rich the first day, there are a few tips you can follow that will help you in those crucial first weeks.

One of these is to simply do your research. Any company you buy stocks from should be thoroughly checked out before hand. You would not want to invest all of your money in a certain company and then find out that all signs were pointing to the company being a failure, and it all could have been avoided if you had simply checked them out first.

If you need money now, like I mean in the next hour, try what I did. I am making more money now than in my old business and you can too, read the amazing, true story, in the link below. When I joined I was skeptical for just ten seconds before I realized what this was. I was smiling from ear to ear and you will too.

Imagine doubling your money every week with no or little risk! To discover a verified list of Million Dollar Corporations offering you their products at 75% commission to you. Click the link below to learn HOW you will begin compounding your capital towards your first Million Dollars at the easy corporate money program.

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Article Source: http://EzineArticles.com/?expert=Perry_Webbing

LEAPS - 3 Strategies For Long Term Options

2009-01-13T00:04:00.000-08:00

By Brad Castro

LEAPS, or Long-term Equity AnticiPation Securities, are really no different than regular options except they have expiration dates much farther in the future (9 months to 2-1/2 years, and always in January).

Stock options, especially out of the money options, are depreciating assets. A defining feature of all options is that the farther away from expiration they are, the slower they depreciate. Conversely, as they near expiration, the more that depreciation, or daily time decay, accelerates.

The primary appeal of LEAPS is an investor's ability to control, for a longer term, more shares with less money and without having to resort to margin.

With these characteristics in mind, here are three strategies that can be used involving LEAPS:

1.) Long LEAPS - Just like buying a regular long call or long put. You make money if the stock makes a big enough move in the direction you desire. Since LEAPS cost more than shorter term options, you must risk more upfront to control the same amount of shares, but you gain the benefit of a much longer time frame during which the stock may make a desired move.

2.) Calendar Spreads - A calendar or horizontal spread (a spread with options expiring in different months) can be set up using LEAPS. This is very similar to writing a covered call, or owning 100 shares of a stock and then selling (for a single cash payment) someone else the right to buy that stock from you at a certain price by a certain date. You can substitute LEAPS (one contract for each 100 shares) in place of owning the actual shares and write near term options against the LEAPS.

Using LEAPS as a substitute or proxy for owning the underlying shares can potentially result in much higher rates of return since LEAPS--depending on the strike price--will cost significantly less than purchasing the stock.

3.) Vertical Spreads - A vertical spread consists of options expiring in the same month but at different strike prices. One such example would be to construct a long term bull call spread using LEAPS. A bull call spread is set up when you buy a call at one strike price (anticipating a rise in share price) and simultaneously sell a call expiring at the same time but at a higher strike price (this lowers the cost basis of your initial long call, but the trade off is that you limit the amount of your potential profits).

The initial cost of the position is the amount paid for the long LEAP call less the premium received for the short LEAP call. The maximum value of the position will be the difference between the two strike prices as long as the stock closes at or above the higher of the two strike prices. Commissions should also be factored in.

Constructing a bull call spread using LEAPS is not a common--or sexy--trade, but if you're extremely confident a stock won't be trading below a certain price one or two years into the future, this can be a zero maintenance and somewhat conservative way to lock in some very respectable double digit annualized returns.

Conclusion:

LEAPS are an additional tool for the versatile options trader. They may not be right for every trader or every situation, but if you're not particularly familiar with them, you may wish to conduct additional research to see if they're suitable for your portfolio.

About The Author:

Article Source: http://EzineArticles.com/?expert=Brad_Castro

Writing Put Options - To Build Your Stock

2009-01-12T23:58:00.000-08:00

By Martin Lukac

Options are used to capture large gains with little capital investment. Small speculators can use them in many ways. One way they are used is to write put options for an issue in which you wish to build a position.

For example, you are looking to buy shares of Teague Manufacturing (a fictional company). You read the annual report and analyze the financial statements. You decide that the price you are willing to pay is $25 per share. However, the stock is currently trading at $30 per share.

You don't have to keep watching the market for the stock to fall before you take action. You can write put options for the shares at $25.

What you are doing is promising that if the shares of Teague fall below the price threshold during the life of the option, the purchaser has the right to require you to purchase those shares at $25. In exchange for your promise, the buyer of your put options will pay you an insurance premium. This amount can vary. We'll say that you are paid $1.12 per share to take on the risk. If you wrote ten puts (options are for round lots of 100 shares), you will receive $1,120. If the option expires and is never exercised, you receive the money.

If the option is exercised, it can lower your cost basis. Instead of paying $25 per share, your actual cost will be $23.88 per share. The premium is subtracted from the price of the share.

Value investors are concerned with getting the highest profit possible at the lowest cost. If you are a value investor, writing a put option can be very beneficial to your portfolio. If the stock doesn't fall, you get to keep the premium payment. If the stock does fall, you are paying for the stock what you originally planned to pay. You determined what the stock was worth to you and you are able to take advantage of it. Either way, you come out on top.

But there are risks to writing put options, as with any other investments. You must be sure that the price you place on the stock you choose is appropriate. You need to understand the relationship between the price and earnings per share.

Keep in mind that there are situations that would make a stock worthless or at least drop dramatically in price. Choose companies that you are sure of for the duration of your option. Make your investment decisions based on the numbers and not gut feelings or the need to make a fast dollar. Look at both the economy and the industry before you start writing put options. It sounds like a great way to make some easy money, but it isn't always a guaranteed win.

Martin Lukac represents RateTake Mortgage mortgage marketplace. RateTake matches consumers with multiple lenders offering low Refinance Rates from our network of accredited lenders.

Article Source: http://EzineArticles.com/?expert=Martin_Lukac

How to Calculate the Volatility of the Spread in Options Trading

2009-01-12T23:45:00.000-08:00

By: Ron Ianieri

To be able to calculate the volatility of the spread, we must equalize the volatilities of the individual options.

First, let's move the June calls by moving June's implied volatility down from 40 to 36, a decrease of four volatility ticks. Four volatility ticks multiplied by a vega of .05 per tick gives us a value of $.20. Next we subtract $.20 from the June 70 option's present value of $2.00 and we get a value of $1.80 at 36 volatility. Now the two options are valued at an equal volatility basis.

Looking at this first adjustment where we moved the June 70's volatility down to 36 from 40, we have a value of $1.80 at 36 volatility. The August 40 call has a value of $3.00 at 36 volatility. So the spread will be worth $1.20 at 36 volatility.

If you wanted to move the August 70 calls instead, you would take the August 70 call vega of .08 and multiply it by the four tick implied volatility difference.

This gives you a value of $.32 that must be added to the August 70 call's present value in order to bring it up to an equal volatility (40) with the June 70 call. Adding the $.32 to the August 70 call will give it a $3.32 value at the new volatility level of 40 which is the same volatility level as the June 40 calls.

Now, our spread is worth $1.32 at 40 volatility. August 70 calls at $3.32 minus the June 70 calls at $2.00 gives the price of the spread at 40 volatility.

It does not make any difference which option you move. The point is to establish the same volatility level for both options. Then you are ready to compare apples to apples and options to options for an accurate spread value and volatility level.

Since we now have an equal base volatility, we can calculate the spread's vega by taking the difference between the two individual option's vegas. In the example above, the spread's vega is .03 (.08 - .05). The vega of the spread is calculated by finding the difference between the vega's of the two individual options because in the time spread, you will be long one option and short the other option.

As volatility moves one tick, you will gain the vega value of one of the options while simultaneously losing the vega value of the other. Thus the spread's vega must be equal to the difference between the two options vega's. So, our spread is worth $1.20 at 36 volatility with a .03 vega or $1.32 at 40 volatility with a .03 vega.

Going back to our original spread value of $1.00 with a vega of .03, we can now calculate the volatility of that spread.

We know the spread is worth $1.20 at 36 volatility with a vega of .03. So, we can assume that the spread trading at $1.00 must be trading at a volatility lower than 36.

To find out how much lower we first take the difference between the two spread values which is $.20 ($1.20 at 36 volatility minus $1.00 at ? volatility). Then we divide the $.20 by the spread's vega of .03 and we get 6.667 volatility ticks. We then subtract 6.667 volatility ticks from 36 volatility and we get 29.33 volatility for the spread trading at $1.00.

We can also determine the volatility of the spread as the spread's price changes. Let's fix the spread price at $1.30. To calculate this, we must first take the value of the spread ($1.20 at 36 volatility) and find the dollar difference between it and the new price of the spread ($1.30). The difference is $.10. This dollar difference must now be divided by the vega of the spread. The $.10 difference divided by the .03 vega gives you a value of 3.33 volatility ticks. Then add the 3.33 ticks to the 36 volatility and you get 39.33 as the volatility for the spread trading at $1.30.

Let's double-check our work by calculating the volatility the other way.

This time we will do the calculation by moving the August 70 calls up to the equal base volatility of the June 70 calls. As calculated earlier, the August 70 calls will have a value of $3.32 at 40 volatility.

The June 70 calls are worth $2.00 at 40 volatility. Thus the spread is worth $1.32 at 40 volatility.

Now let's again move the spread price to $1.30, $.02 lower than the value of the spread at 40 volatility. As before, we take the difference in the prices of the spread. The result is $.02 ($1.32 - $1.30). Then, divide $.02 by our spread's vega of .03 (remember that the vega of the spread is equal to the difference between the vega of the two individual options). $.02 divided by .03 gives us a value of .67. That .67 must be subtracted from our base volatility of 40. That gives us a 39.33 (40 - .67) volatility for the spread trading at $1.30. This volatility matches our previous calculation perfectly.

At first glance, you might be wondering why we went through all of these calculations. With the June 70 calls at 40 volatility, price $2.00, vega .05 and the August 70 calls at 36 volatility, price $3.00, vega .08 why not just take an average of the volatility? This would give us a 38 volatility for the spread with a price of $1.00 when in actuality $1.00 in the spread represents a 29.33 volatility.

This would be almost a nine tick difference which represents a whopping 30% mistake! Because, as stated earlier, vega is not linear; you can not weigh each month evenly and just take an average of the two months. For argument's sake suppose you did. Let's say you found the difference of the vegas of the options and came up with a spread vega of .03 which is correct. However, when you try to calculate the spread's volatility and price you would have difficulty.

Now, recalculate the spread with the trading price of $1.30, or $.30 higher than your value at 38 volatility. Divide that $.30 higher difference by the spread's vega of .03. You get a 10 tick volatility increase. Add that increase to the base 38 volatility. That would mean you feel the spread is trading at 48 volatility instead of a 39.33 volatility! This type of mistake could be very, very costly. Remember, apples to apples, oranges to oranges. It doesn't matter which option's volatility of the spread you move as long as you get both options to an equal base volatility.

Article Source: http://www.articlesnatch.com

About the Author:
Ron Ianieri is currently Chief Options Strategist at The Options University, an educational company that teaches investors how to make consistent profits using options while limiting risk. For more information please contact The Options University at http://www.optionsuniversity.com or 866-561-8227

Article Source: http://www.articlesnatch.com

Stock Options - The Greatest Wealth Building Tool Ever Invented

2009-01-12T23:30:00.000-08:00

By: Danny Swad

It is a well known fact that serious investors seeking long term growth of capital have as their main objectives the two most basic goals in investing:

- to find an investment vehicle that would effectively preserve capital and minimize risk in the face of a fluctuating and constantly flexing economy
- the investment vehicle must provide better than decent yields in all economic conditions to promote constant growth of capital value.

With the stock market as the premiere choice due to its historical record of outperforming all other investments over time, people are increasingly turning to the stock market as their main investment vehicle for future capital growth. It is here where much higher rates of return can be made with a relatively small increase in risk to capital.

With thousands of books, manuals, internet sites, seminars and courses offering investment strategies and trading systems in the stock market and its derivatives, there are few, if any, that deliver the ideal investment vehicle sought by the long term investor in search of safety and high returns. Not only is there a near total absence of an ideal investment system but there are many that promise eye popping, mind boggling returns and, they are exactly that; mere promises.

Most of the trading systems offered are structured on strategies or activities that work when conditions are ideally suited to the program being peddled. Most of their successes are highly dependent on picking the right stocks at the right time. In other words you must be a good stock picker or use a stock picking service (for a high monthly fee) to select the right ones for you. Market timing is also an important factor in their systems. Again, you must be a good market timer or depend on a service that provides market timing signals (also for a high monthly fee). These supposedly high yield investment programs don't say anything about how bad things can be when conditions go against their predictions. These programs do exactly as promised: great when the going is good but disastrous when the going is bad. Without doubt many have been taken by these so-called services and while an investor/trader may be successful for a while, the end result over a long period of time is always the same - no better than if you had done the selections yourself.

While there is no one investment system or vehicle that can be an answer-all to the various goals of various investors, there are some investment alternatives that can come close to satisfying the two basic needs of safety and decent returns. Diversified mutual funds have been touted as the answer to these basic needs. But over the years these funds have shown that during downturns in the economy they perform just as badly as the whole investment market in general. And, over the long term, many of these diversified funds have failed to even match market performance in general, much less outperform it.

Enter market derivatives with emphasis options.

Trading in stock options has become very popular with institutional investors as well as private individuals as a sound money management system supplementing their investment portfolios. The ability of stock options to give the investor a wide range of choices is what has made the options market grow considerably over the last two decades. To quote one options expert: "Stock options are the greatest wealth producing tool ever invented on this planet. . . . if you know how to use them".

The key element of this statement is: . . . if you know how to use them.

For many people the mere mention of stock options, sends shivers up their spine. They look at options as synonymous with great risk. But isn't driving a car very dangerous for one who doesn't know how to drive? The ability of stock options to give the investor a wide range of choices in stock market investments is what has made the options market grow by leaps and bounds over the last twenty years. Statistics compiled by the Options Industry Council, a group that educates investors about options, show that volume in options trading has risen tremendously in recent years. Further, studies show that individual investors make up 60% of the market.

For the individual who has sufficient funds and is looking for more than a decent return on his capital and with controllable risk, stock options may be the answer.

There are dozens of option trading systems being employed by individual investors and institutions. Each system is designed to accomplish a specific investment goal. A financial institution may use long put options to hedge its winnings in stocks that have appreciated in value. Another investor may buy call options instead of stocks to enter a position in a security that has caught his fancy. Still another may sell calls against his stock holdings to generate income from his stock position, or what is popularly known as covered call writing.

Of the dozens of option trading systems there is one that can be carried out as a long term investment program offering a fair degree of safety and consistent high returns over time, thus satisfying the investor's two basic needs of safety and return.

This is the selling of uncovered or naked options.

But wait! Is it not said that selling naked options carries the risk of unlimited losses? Isn't this a contradiction?

Indeed selling naked options when done carelessly and without a disciplined strategic program is extremely risky!

But by using a carefully planned and disciplined system of trading, the so-called "unlimited risk" factor in selling options can easily be conquered. There is a three-pronged trading strategy being used by one successful options trader that is proving to be a consistent winner in all market conditions. It is a trading technique that couples naked option selling with a modified ratio credit spread and the use of the roll over feature. While naked option selling has acquired a bad rap of being highly risky, this three-pronged trading strategy allows the trader to defeat the risk. Not only is the system able to substantially reduce the risk, it also offers one the ability to become a savvy investor/trader without having to depend on picking the right stocks or timing the market.

It involves utilizing the system in any market condition using only one or a few stocks, ETFs or indexes (the latter two are more effective). One need not worry about finding the right stocks or timing the trades. The fact remains that stocks behave, more often than not, in crazy and irrational ways so that one can almost say that consistently choosing winning stocks is as good as a random walk down Wall Street. Rather than be proactive and try to predict and time the market, as many try to do, this three-pronged investment system is reactive. The prescribed trades are done in reaction to how the market has moved, not in anticipation of its future behavior.

This three-pronged trading system does not promise quick profits or mind boggling yields but steady annual returns in excess of 30%. Many are averaging returns of 50% to 60%. It would be prudent to say that in times of deep downturns the system may not deliver the promised returns but it will hold its own and will definitely outperform the market.

One options trader that has mastered this three-pronged trading technique has decided to share his knowledge of the system by writing an e-book on its methodology. Borrowing from that quote about options being a great wealth producing tool he has aptly titled his work: STOCK OPTIONS: THE GREATEST WEALTH BUILDING TOOL EVER INVENTED. In it he details the step by step methodology of this trading technique and gives an exhaustive series of sample trades covering several months of transactions. It shows the effectiveness of the system in an up market, down market and horizontal market using only one ETF stock. To this day the writer continues to use only one or two ETFs in all his options trades and he includes a web page that shows his current and actual trading results month by month on an ongoing frequency.

Article Source: http://www.articlesnatch.com

About the Author:
The author is a semi-retired business executive who now dedicates time to trading stock options. His stock and options trading experience spans nearly 30 years. He has been specializing in selling naked options for the past several years and has written a 'how to' ebook about his successful trading system. For more information: http://www.theoptionseller.com

How To Make Passive Income In Stock Market Using Option

2008-12-12T04:54:00.000-08:00

Covered write/calls is ultimate technique for anyone to generate income every month.

Let's say an investor with $50.000 portofolio of optionable stock could make $ 1000 per month that's 24% annual.

How to do that:

1. buy 1000 shares at $10/share and then sell or write call OTM $11/share

2. If the stock price stay at $10 and the option expires you will receive the premium. Your profit is the premium.

3, if the stock goes up $13, you will receive premium and capital gain (because you sell at $11/share) so your profit are the premium price + $1/share. You only lost opportunity gain

Once you master the covered call strategy you will have ability to generate income from your portofolio on a monthly basis for the rest of your life

By Iwan Agustinus
source: http://onlyoption.blogspot.com/

The Four Basic Stock Option Trading Strategies For Mastery

2008-11-17T03:48:00.000-08:00

Stock option trading offers more flexibility, leverage, and limited risk than any investment vehicle today. At this point in financial history the availiability to access the derivative markets with online option trading now puts the power of these sophisticated instruments in the hands of the trader on Main Street as well as Wall Street.

In contrast, the potential of these instruments can also be a little intimidating for some aspiring option traders because some strategies seem so complex. However, by gaining a foundation in four basic option strategies you can begin mastering the building blocks of all the available strategies that stock options have to offer.

The basic strategies are four in number and are the long call strategy, the naked call strategy, the long put strategy, and the naked put strategy. A long call strategy is taken when a trader is bullish on a given stock and looks to utilize the leverage of options to capture a greater gain on a stocks upward move.

A call option allows the option trader to control 100 shares of a stock for a small premium while restricting his risk to just the price of the premium. This strategy allows your reward potential to be unlimited while your risk is limited to the cost of the call option. As the expiration date for the call option approaches though time decay works against this position so you must factor time into your trading decision when using this strategy.

The short call strategy is also called the naked call strategy and is implemented by allowing another trader who is the owner of a given stock to sell you the cost of a call option or the option's premium. This is an advanced bearish strategy that lets you generate income by allowing time decay to work for you if the stock falls or remains static.

Unfortunately, if the stock rallies you are theoretically exposed to unlimited risk so you must have a stop point and if that is reached then you must buy back the call options to limit losses. The long put option strategy is similar to the long call except you are bearish on a stock. When you go long a put it means you are buying a put option that controls 100 shares of a stock because you believe the stock is going to decline in value.

Your risk is limited to the premium paid for the put option while your reward potential is almost unlimited. Time decay works against you on this strategy so if you use it be sure to give yourself enough time to profit.

The short put strategy, also called the naked put strategy, is used when you are expecting a stock to rise in price or remain at near the same price level for a given amount of time. Your reward is the cost of the put option if the stock rises or remains static but your risk is theoretically unlimited if the stock declines. If it falls in price and hits your stop loss point you must buy back the puts to limit your risk. This is a bullish strategy that is a short term income generator when used properly.

By taking the time to understand how each of these strategies work in a variety of market conditions you will begin to gain the foundation to master implementing them in combination.
These incredibly effective risk reducing, profit enhancing instruments allow for over 60 different stock option trading strategies but all these combinations begin with these basic four strategies.

As you gain mastery over how to coordinate them you will be able to put yourself in the best position to profit while maintaining the ability to limite your risk. Good trading.