Options Trading Strategies

By: John Roney
Webster's Dictionary defines the term strategy as " 1 a) the science of planning and directing larger scale military operations, specifically (as distinguished from TACTICS) of maneuvering forces into the most advantageous position prior to actual engagement with the enemy b) a plan or action based on this. 2 a) skill in managing or planning, especially by using stratagems b) a stratagem or artful means to some end.

When applying a definition to investing in the market, we want to pay particular attention to the words "maneuvering into the most advantageous position prior to actual engagement" and the words "skill in managing or planning especially by using stratagems."

Picking a stock or group of stocks is only half the battle. Making the most from the chosen investment opportunity is the other half. This is where your strategy comes in.

The wrong strategy even when applied to the right opportunity can increase risk, decrease profits and even create a potential loss. Understanding proper strategy is critical.

The actual selection of an investment opportunity from those offered normally depends on the type and style of research the investor favors and deems necessary.

This selection process, or "investment selection protocols," is a checklist of different types and pieces of data that are favored by the individual investor.

These pieces of data can consist of charts, indicators, oscillators, fundamental analysis, news or even tips.

Each investor has his/her own investment selection protocol. As an investor, once you complete this process and choose your investment opportunity, your strategy takes over. Inherent in the selection of the stock is expectation.

Every investor has some expectation for any chosen opportunity. Therefore a strategy must be selected which best fits those expectations.

The proper strategy is the one that allows for the highest possible return with the least amount of risk and the best possible protection that can be afforded.

Obviously, since every opportunity will have a somewhat different expectation along with different variables surrounding it, each opportunity should have a different "ideal" strategy. By and large, when choosing a stock to invest in, most investors look to purchase a stock they think will go up. The directional play is a good place to start our discussion of option strategies.

An option is a derivative trading product that is best used by investors as a hedging tool providing profit protection and profit enhancement. Although it is a powerful risk management tool, it can also be used effectively as a stand-alone trading vehicle.

Under the proper conditions, options do not have to be paired with stock or another option to be an effective trading tool. To successfully trade naked options, an investor must realize that certain options will fit certain scenarios and certain options will not.

One of the major misconceptions that investors have about options stems from the fact that most do not know how to trade them properly. When they lose money trading them, they feel that there is something wrong with the option. They do not understand that options are on a higher, more sophisticated level when compared to stocks.

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