Clearly this means that an options trading strategy is necessary for the most beneficial results. The main question then is how to go about developing a strategy? That requires clear-cut goals and plans, but options trading is such a flexible activity that it can help all kinds of investors to meet their goals.

Consider that there can be an options trading strategy in place for times when the markets take a nose dive, improve dramatically, or even when they remain stable or neutral for a long period of time.

Perhaps it is best to first explain a bit about the various activities available to those who are interested in options trading, and how these can be strategically used towards the meeting of financial goals.

In the world of options trading, the investor can choose to both buy and sell – just like those working in the stock markets. The main difference is that those selling and buying options may never have to actually own the underlying assets. Instead, they are working with legal contracts around the performance of those financial vehicles and then gaining or losing financially based on the terms of the contract.

For example, an investor may believe that a particular stock (for which they do not own any shares) is going to increase dramatically in value over the course of the coming weeks. They do not, however, have the income to make the investment in the actual stocks at the current time. Instead, they purchase a “call” option that guarantees them the opportunity to make a purchase of the stocks at a fixed price for a specific period of time. If the stock does indeed spike in value before the option expires the investor can either make the purchase at the significantly lower price, or they can sell the option for a profit instead.

This exchange is not free of charge, and this is where a good strategy must be in place in order to identify if the “strike price”, the “premium” for the option, and the “expiration date” on the contract will all add up to the amount of profit desired.

When you buy the right the buy stock any time before the end of the options contract you are buying a call. When you buy the right to sell the stock any time before the end of the trading contract you are buying a put. The value of a call increases as the value of the underlying stock goes up and the value of a put increases as the value of the underlying stock goes down.

A neutral or “non directional” options trading strategy is to “bet” on the movement of the underlying stock, whether up or down does not matter. The long straddle options trading strategy works well in very volatile markets. It works better in the American options trading system than in the European options trading system because in the American options trading system one can exercise the option at the ideal time whereas in the European options trading system one can only exercise the option at the end of the options contract.

The only risk in using a long straddle as your options trading strategy is that the stock will not go up or down. Then you will have paid premiums for both the call and the put. This is opposed to a short straddle where you sell both a call and a put, pocket the premiums and hope that the stock does not move. In this options trading strategy you can lose substantially if the stock moves substantially in either direction.

A long straddle can also be used when you own the stock. A typical example is when a stock has had an excellent run and the owner 1) wants to insure against a large correction of the stock price and 2) wants to be able to buy more stock at the current price if the stock continues to appreciate rapidly. In each case the person using the long straddle will be able to buy (exercise the call option) or sell (exercise the put option) at the strike price (exercise price) even when the spot price (market price) is substantially higher or lower.

In using the long straddle the person is never going to lose more than the price of two premiums and has the potential to gain substantially. If the person already owns the stock this may mean protecting previous gains in a stock or allowing the purchase of more stock at a discount. In this case the hedging that a long straddle allows is an insurance policy in the form of an options trading strategy.

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.