For anyone who wants to get into options, the first foray into options trading strategy can be extremely confusing. The basic concepts of the options market are fairly simple for most people to grasp, but when it comes to options strategy, it’s often a different story. The many different approaches to trading options can confuse just about anyone.
Most people know that options can be either bought or sold. This is the most basic options trading strategy, but there are far more complex ways to trade options. Traders who know the market well use spreads to reduce the cost of the investment while maximizing the profits they make. This means they combine transactions that work together to create a unified strategy by purchasing differing types of options on the same underlying asset.
Basics options trading strategy follows the trend that when an asset’s value is predicted to rise, a call option is purchased and when it is expected to fall, a put option is the right choice. But because markets are volatile and predictions can be very difficult to make with accuracy, it sometimes makes better sense to purchase both a call and a put on the same asset. With different strike prices and expiration dates, you can spread the odds of making a profit.
No matter what the asset in question does in terms of value, having both a long call and a long put on that asset makes it more likely you will realize a profit from the options. Your call option grows in value as the asset’s value also grows, while your put option grows in value as the asset’s value declines. AS one option rises in profitability, the other must lose some or all of its profitability; either way, you lose only one of the premiums.
A good options trading strategy means using the right combination of calls and puts at the right time in order to create a plan for profiting from the option in the most possible ways. Understanding when and how to use these transactions is what makes creating options trading strategy such a challenge; it requires a great deal of knowledge and understanding of both the options market and the assets involved.
Choosing the best options trading strategy is difficult unless you know what you are doing. Weighing and considering all of the variables involved makes it more likely your strategy will succeed.