The Basics Of The Option Trading Strategy PDF Print E-mail
Written by Fabian Lee   
Friday, 21 May 2010 18:19
In the financial world an option trading strategy is the sale or purchase of an open position or underlying position. These strategies can be either bullish, bearish, or neutral. All of which are financial lingo for to describe the way in which a purchase is obtained. The estimated value of a stock is what ultimately determines which strategy a trader will use.
by FabianLee


In the financial world an option trading strategy is the sale or purchase of an open position or underlying position. These strategies can be either bullish, bearish, or neutral. All of which are financial lingo for to describe the way in which a purchase is obtained. The estimated value of a stock is what ultimately determines which strategy a trader will use.

Strategies that are neutral are used when the broker is not able to adequately determine the outcome of a stock. These are often called non-directional strategies. There are many different neutral strategies. These neutral type strategies can be used anytime the broker is unable to determine the projected outcome of a stock. Even when the stock broker doesn't know which way the stock is likely to go some prediction is still merited to determine the volatility of the neutral stock.

Some neutral strategies include: guts, butterfly, condor, straddle, strangle, and risk reversal. These are different financial terms for how to go about getting the stocks and what to do with them after they are acquired. In other words they determine when to sell in and when to sell out.

Bullish strategies are implemented when a trader thinks that the stock price will increase. These strategies can only be used after the trader has determined how high they predict the stock price will go and how quickly it can get to that point. After this has been determined the broker then chooses which of the many bullish strategies best fit the situation.

The bullish type strategies include the bull call and the bull put. The most simple form of this strategy type is known as a call buying strategy. This is one used the most by beginning brokers.

Stocks do not rapidly increase worth under normal circumstances. This is why moderately bullish strategies are very popular. This method involves a set price for the bull run. The trader then spreads to reduce the cost. This will not decrease the risk but it does help to level out some of the associated costs. The ultimate profit possible for bullish strategies is predetermined but they typically cost the trader less. The bull call spread is one of the many types of bullish strategies.

Bearish strategies are the reversal of bullish type strategies. These are used when a trader is expecting a stock price to drop. An estimate of the time it will take for the stock to drop and how far it will plunge are important to choosing a strategy. There are a lot of different bearish strategies so the broker must choose the correct strategy to ensure success.

Bearish trading strategies include the simple put buying strategy, the bear call spread, and the bear put spread. The primary object of all bearish strategies is the same. Bearish traders are hoping to minimize the risk, despite the lack of profit that will be yielded.

Even when the stock is predicted to decrease in value the overwhelming majority of bearish strategies will still garner a profit. That's why these strategies are implemented. The strategies will only bring a profit if the stock doesn't go higher in worth before the option expires. This is why it is vital to predict when that expiration will occur.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

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