Stock option trading offers more flexibility, leverage, and limited risk than any investment vehicle today. At this point in financial history the availiability to access the derivative markets with online option trading now puts the power of these sophisticated instruments in the hands of the trader on Main Street as well as Wall Street. In contrast, the potential of these instruments can also be a little intimidating for some aspiring option traders because some strategies seem so complex. However, by gaining a foundation in four basic option strategies you can begin mastering the building blocks of all the available strategies that stock options have to offer. The basic strategies are four in number and are the long call strategy, the naked call strategy, the long put strategy, and the naked put strategy.



A long call strategy is taken when a trader is bullish on a given stock and looks to utilize the leverage of options to capture a greater gain on a stocks upward move. A call option allows the option trader to control 100 shares of a stock for a small premium while restricting his risk to just the price of the premium. This strategy allows your reward potential to be unlimited while your risk is limited to the cost of the call option. As the expiration date for the call option approaches though time decay works against this position so you must factor time into your trading decision when using this strategy.

The short call strategy is also called the naked call strategy and is implemented by allowing another trader who is the owner of a given stock to sell you the cost of a call option or the option's premium. This is an advanced bearish strategy that lets you generate income by allowing time decay to work for you if the stock falls or remains static. Unfortunately, if the stock rallies you are theoretically exposed to unlimited risk so you must have a stop point and if that is reached then you must buy back the call options to limit losses.

You implement a long put strategy when you are bearish and are looking to exploit a downward directional bias in a stock. You buy a put option which allows you to control 100 shares of a stock and take advantage of the high leverage that put options allow. Theoretically, your reward is almost unlimited with this strategy and your the most you can lose in a worse case scenario is the cost of the put option. This is a bearish directional strategy and time decay works against you so be sure you give yourself enough time to profit with your trading system.

The short put strategy is used if you are bullish on a stock or believe is will trade at the same price level. This is also similar to the short call and has the same implementation except you allow someone to sell you a put. You stand to gain short term income from the premium and time decay works for you as you approach the expiration date while the stock goes higher or stays at the same level. This is also considered an advanced strategy and you must be sure you have enough experience trading options before attempting to trade this strategy without a hedging position.

By gaining a deep understanding of these four stock option trading strategies you will have the foundation to having mastery of them for huge returns. You will not only gain mastery over them by trading them effectively as individual strategies but you will begin to understand how to combine them which will let you control your risk while putting yourself in the best possible position for big profits. There are over 70 option strategies to trade for superior returns in today's markets and you learn how to use them all for your advantage but it all starts with these four basic strategies detailed here.