When trading options, you may feel confused or daunted by the vast array of different choices. From choosing which options to buy to determining what to do with them, decisions are at the center of trading stock options. Determining what to do can sometimes be a bit challenging. Many traders find it helpful to employ options trading strategies which help to guide their decision making process.
Developing an options trading strategy is fairly advanced. It requires a level of expertise generally accumulated through a quality options trading training course. Why is this? It’s because designing effective options trading strategies necessitates a thorough grounding in fundamental options concepts. Additionally, it requires you to understand more advances concepts used to fine-tune the strategies. Ultimately, however, these kinds of skills can be developed easily through a training course instructed by an experienced professional.
For the purposes of this article, we will discuss a basic options trading strategy decision. Which type of option should you go for and what should you do with it once you’ve bought it?
The first type is a call option. If you’ve purchased a call option, you maintain the right but not the obligation to purchase the underlying asset at the rate agreed upon with the seller. These options are great for controlling a large amount of stock that would otherwise be impossible to obtain.
When do you exercise or sell a call option? You can profit by exercising or selling a call option when the underlying asset’s value has increased to a level higher than its strike price and premium combined. By exercising or selling an option at this point, you are guaranteed to receive a return on investment. If the option’s value has declined, on the other hand, sell it or just let it expire worthless. In the latter situation, you cut your losses at the premium.
With put options, the situation is a little bit different. With put options you are buying the privilege but not the obligation to sell the underlying asset at the strike price at any time before the expiration date. In this situation, you’ll still have to pay a premium, but you control plenty of stock that you may sell for way over its market value. In this situation you can profit from the exchange. If the underlying asset’s value increases, you may let the option expire, but if it decreases, when you exercise you sell stock for much more than it’s really worth.
These options trading strategies should give you a hand in developing a basic understanding of how options work.
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