Monday, December 10th, 2018

Long Options Strategy

December 21, 2009 by T.D. Thompson  
Filed under Options Trading Tips

 

In general, a long options strategy minimizes risk and presents the potential for substantial profit. For example, long calls and long puts will only cost the price of the premium if they do not work out but will pay handsomely if, in the case of a call, the stock rises in price, or, in the case of a put, the price of the stock drops substantially. A long options strategy can also include a long straddle in which the trader buys both a call and a put on the same stock at the same price and expiration date. A long strangle is a similar options trading strategy but the strike prices are not the same.

A long call is purchasing a call option. Rather than buying the stock the trader purchases the right to buy the stock if he or she chooses. If the stock goes up in price the trader will buy the stock but at the price when the contract started, the strike price. If the stock goes up this long options trading strategy allows the buyer of the call option to buy the stock at the lower, strike, price and sell at the current market price, the spot price for a profit. The risk for this long options strategy is that if the stock does not go up in price the trader loses the premium and he or she paid to buy the option.

If a trader uses a long put as a long options strategy he or she purchases the option to sell stock at the strike price which he or she will only do if the price the stock goes down. In that case the trader will buy at the lower spot price and sell at the higher strike price making a profit.

In using a long straddle as a options trading strategy the trader buys both a call and a put on the same stock at the same price with the same expiration date. In this long options strategy the trader is hoping that the stock goes either up or down substantially. The risk in this long options strategy is that the stock price will not change and that the trader will loose the price of both the call and put option. If this long options strategy works the trader makes the difference between the strike price and the spot price minus the cost of two premiums.

A long strangle is very similar to a long straddle options trading strategy. The trader buys both a call and a put on the same stock with the same expiration date. However, the prices are not the same. Like the long straddle as a long options strategy the long strangle has the potential for substantial profit with the risk of losing money on the two premiums paid for the call and the put.

In the case of both the strangle and the long straddle the trader expects there to be a lot of volatility to the underlying stock but has no clear idea of which way the stock will go. Using either a long straddle or a long strangle as a long options strategy makes sure that the trader will not lose out on a profit from a large stock move, either up or down.

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