Sunday, December 8th, 2019

Options Trading Strategies

 

Options trading strategies vary according to the skill set and risk tolerance of the trader or investor. Those who buy options to hedge risk will take a different approach from a speculator who follows trends or trades in an established channel. Investors, day traders, and companies buying and selling commodities or various products internationally all develop options trading strategies suitable to their expertise and desire to limit risk or garner profits in options trading.

Guaranteeing a Profit and Limiting Loss

A company that mines gold may be concerned about the price of gold bullion in the following two or three years. They have invested heavily in new mining operations and need gold to remain at its current value or go up in order to make a profit. A common approach taken by such companies is to sell gold futures on the futures market. Another approach is to buy options on contracts to sell futures. If the price of gold goes up the company will not execute the options contract but if gold falls in price the company will execute the contract and sell their production at the contract price instead of the now-lower price of gold bullion. Likewise companies that buy and sell products and services internationally will use options trading strategies in order to hedge currency risk in payment. In each case hedging risk with options is a useful strategy.

Stock Profits with Options

Long options trading can be profitable for stock owners. Being long in a stock means that you own the stock. Savvy investors often stocks who value fluctuates up and down in a channel. When the stock is approaching the top of the channel the long term investor may feel secure that the stock will not break out but will rather pause or even fall a bit. This investor can profit from selling calls on his stock. He will receive a payment for selling the call contract and, if his analysis is correct, will not need to sell his stock as it will not go up appreciably in price. Often times a stock owner can add the periodic selling of a call option to his dividend payments to increase the income he receives from his stock. The worst case in this scenario is that the stock goes up in price and the buyer executes the contract. The former stock owner misses out on a bump up in the stock but still gains the payment for the options contract and never loses money in the bargain.

Following the Market in Search of Profits

Many traders use options because of the investment leverage they provide and because they allow the trader limit his investment risk. These traders engage in a wide range of day trading and longer term options trading strategies in search of profits. They seldom execute an options contract but rather enter and exit trades in the most profitable manner. The best style of options trading for an individual will depend on his skill set and risk tolerance. Options trading strategies such as range trading work for medium term traders while options strategies such as scalping work for day traders. In each case traders make use of sound fundamental and technical analysis to guide their trades.

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