Naturally, any investor is going to have their own opinions and personal outlook, but the facts and the data are going to usually indicate where any particular issue is headed. This means that one of the first steps for any serious investor to make is to conduct thorough research about the vehicles in which they intend to place their money.

Options trading means knowing when to buy a “call” or a “put” option, and what to do with it before it expires. This is actually the very foundation of any stock option trading strategy because it is the primary way to make money in this venue.

In all reality, the true “strategy” comes from knowing what to do with any investment in the face of market trends. For example, common option trading knowledge says that a bullish market or stock requires the purchase of call options because the asset is going to gain in value. This is usually referred to as a long call strategy. On the flip side, when a market or particular issue is declining (known as being  “bearish”) most investors set out to purchase put options. This is referred to as a long put strategy. Either way, the investor is usually hoping simply to see the item move far enough in the given direction to both cover the cost of the premium and to deliver a profit.

If the above paragraph is confusing in any way, it is quite likely that you need to enhance your knowledge about options trading. This is actually the key part of any sound strategy because an investor cannot make the right choices without first knowing all of the “basics” of options trading. Even if you are planning to hire a brokerage or financial firm to help you with developing your portfolio, you must understand what it means to operate in options trading if you are going to see the greatest returns.

Once you understand whether buying or selling options are right for the particular issue and current market trends, you will also need to understand any other factors that might affect the outcome of the investment. This is best done through study; and modern investors have the Internet as well as formalized, guided programs to help them reach their goals.

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.

Short selling is selling assets that you have borrowed from a third party. The way this works is that you borrow shares from a broker and then sell them at the current market value. Your hope is that the stock will decrease in value so that you can buy the shares for less. Your profit is the difference between the original price and what you sell the shares for, minus the cost of borrowing and commissions. Short options trading is similar except that you need not borrow the stock. In options trading the either buy or sell a right to buy shares. The leverage in options trading can therefore be more substantial than in non options trading.

In buying a short when you do not own the stock the only risk is that the stock does not move in value or goes up in price. Then you will not exercise the option and you will lose the premium that you paid. This is a strategy that anyone can use as the potential options trading loss is limited.

In short selling a put in options trading you run the risk of a substantial loss if the stock price goes up substantially. This is an options trading strategy for the more experienced trader who believes that a stock will go down in value. In all options trading one needs to keep in touch with the market so that if the fundamentals of the stock or the market change appreciably one can get out of the position and cut one’s losses.

A prime advantage in a short options trading strategy is that it can be carried out with less capital. The leverage allows a trader who anticipates a substantial drop in a stock price to profit by buying a put and allows a trader who correctly predicts that a stock will not move or will go down to profit repeatedly on selling call options. The safer and potentially more lucrative options trading strategy is to buy puts, but only if you are correct often enough to make money because you do need to pay the premium with each contract.