Options Trading Strategies

Options Trading

• Options trading requires the trader to understand the underlying stock, currency, bond or portfolio as well as how the option trades relative to the broader market. Options trades require firm research, perspective and discipline. Not all options transactions make money. For that reason, many options traders say that the ability to limit options trading losses is essential to success. All options traders should read information supplied by the Options Clearing Corporation (OCC prior to transacting options trades through a dealer firm.

Options Trading

• Options traders run the risk of losing 100 percent of capital if they hold ‘long positions’ The purchase of a long ‘call’ or long ‘put’ requires exercise or sale before expiration.

Free Trading Tools

• Free options tools help traders to test market ideas. An understanding of volatility and other factors impacts the trader's success.

Free Trading Tools

• The CBOE (Chicago Board of Options Exchange) offers tools to test trades before committing funds to the strategy. Completely free virtual trading tools assist traders in entering both simple and complex trades.

Free Trading Tools

• To track symbol, price of the underlying (stock), contract cost basis, current price, extended contract cost basis and market value, check the "Account Positions" page.

• Traders instantly learn whether any position is currently making or losing money. Traders may also make notes in the CBOE system, in the trade screen. To know if options positions are "cheap" or too rich, check the ‘Options Calculator’

• Identify active trading ideas with the ‘Volatility Finder’ and ‘Volatility Optimizer’

• Learn to improve your trading by entering orders for spreads, covered calls, long options and other strategies. The "Quote Detail" screen provides real-time market quotes. To understand any trading term, refer to the CBOE's handy Glossary. For almost immediate assistance, use CBOE's live chat support.

Call options

• Investors often choose to trade calls and puts rather than converting or exercising the options to the underlying security. Instead of committing capital to MNO stock, the trader believes that the stock price will rise within 90 days.

Call options

• The trader doesn't buy shares for the short-term trade because MNO trades at $90.43 per share: they buy less expensive options instead.

• The trader purchases MNO 95 calls that expire in March for $2. Because MNO isn't trading at the strike price (95), the trader buys an out-of-the-money call. According to author Oliver L. Velez in "Options Trading Tactics," (2012) the trader buys time value. When MNO rises to $95 per share, the option then trades in-the-money.

• An in-the-money option moves at or close to the movements of the underlying security. The investor sells MNO 95s at $5.75 as the shares reach $95.75, pocketing $3.75 on a $2 investment.

• Conversely, if MNO stock loses money during the period the investor owns an out-of-the-money call (in the above example), she will lose money. Traders usually have less interest in owning MNO 95s when the stock trades at less than $90 per share. Traders bullish on MNO's stock price are likely to purchase an $85 or $90 strike price now.

Put options

• If the trader thinks that MNO stock will lose value, she purchases a put. She buys MNO March 90s when MNO trades at $92 per share. In this example, the put is already in-the-money. If MNO's shares sell off, the put should trace the stock's decline. The trader makes money on the short side of the market without taking unlimited risk.

Further Reading…

• Options Trade Review is the #1 online options trading destination. Visit us for all the latest brokerage house reviews and 2012 discount and promotion codes at http://optionstradereview.com/