Option Trading Strategies

So now that you have learned the basics from our basic Options Tutorial article and understood what options are and how to buy options, you've learned option trading strategy one. That is, the strategy of simply buying Call and/or Put options. You might decide to buy options for various reasons. For Call options,

• Buy the option and sell it back when it appreciates. So you buy and sell options as you would buy and sell stock. The leverage is there so you have the potential to make more money. But the potential is also there to lose more money. Also you have more to make sure you are in a liquid market. That is, the volume for the particular option contract is sufficiently large enough so you can get in and out with ease. Trading options on well known companies and popular ETFs (like SPY) are good ways to go.
• Buy the option and hold it until it expires. You may want the option to (pardon the pun) buy the stock if it does appreciate in the time frame you anticipate. If it does, you just locked in a lower price. But logically speaking it would add to your cost basis.
• You want to realize short term gain from an increase in the stock price but you don't have enough capital to invest in the stock itself or you don't want to invest so much in the stock. Actually it is not just for short term gain since you can buy options with expiration dates of more than one year.

• Buy and sell the options like stock (same reason as in Call option above).
• You want to protect yourself against downward movements in your stock. If the stock were to take a sudden dramatic dip you will have unrealized losses which can be offset by the appreciation in your Put option. On the other hand, if you stock keeps going up and your Put option expires worthless you will have incurred a meaningless cost. It kind of feels like paying your health insurance premiums when you never see a doctor.