Options Trading Strategies
Options Trading Strategies
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 produce increased risk, decreased profits
and even potential loss. Therefore, understanding and
applying the 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 will be the strategy thay 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 as good a place
as any 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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