Introduction to Options Trading

Options trading is the perfect trading strategy for those who are considered as sophisticated investors and for individuals who want to earn good profits through stock trading. If applied systematically and logically, this strategy can earn huge profits and generate consistent cash flows to individuals also. Basically, two types of option are available in the Stock Market. They are as follows:

· Call option: A call option refers to an option that provides the buyer exercising that option the right but not a compulsion to buy a stock at a predetermined price within a specific time period (usually between 4-6 weeks).

· Put option: A put option refers to an option that gives an opportunity or right to the seller and not any compulsion to sell a stock at a predetermined time at a specific price.

In order to earn a good amount of money in options trading, you have to become the seller (writer) of the option. This is because by becoming the option seller, you own the right to receive a premium for your trades. This would become a brilliant form of cash flow for your other investment strategies that you are planning about.

You have to decide the right time for selling an option. Keep in mind that each passing day decreases the price of your option.

There are various option strategies that you can go for. They have the minimum risk factor and help to earn respectable profits. Some of the most common and popular ones are mentioned hereunder:

1. Selling Credit Spreads: In this strategy, your success mainly depends on simplicity with which you trade. This strategy is not suitable for hyperactive traders. To earn good profits, all you need is to know the tact to carry out a simple analysis of the present trend in the market and full focus on your selected list of stocks. This is an extremely profitable strategy.

2. Selling Naked Puts: This strategy works mainly when the market trend is rising upwards. There is very less risk involved in this strategy. The best thing is that just like credit spreads, this strategy also takes your profit upfront.

3. DITM (Deep-in-the-money) options: This is a good swing trading strategy. It allows you to buy stocks at about half the price, thus doubling your profit margin. This strategy deals with short term trades (usually 3-10 days). Another benefit of this strategy is that the price movement of your option exactly matches with the price movement of the stock, thus bringing enough profits for you.

4. Complex strategies: It involves strategies like straddles, strangles, iron condors and butterflies. They are all low risk and highly profitable strategies. The only disadvantage of these strategies is that they are very expensive.

It is important to note that options trading involves a high-risk factor if purchased individually. In case you are knowledgeable and have done a good research, you can apply strategies that make options trading less risky and more profitable as compared to simple stock purchases.

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