The Four Basic Stock Option Trading Strategies For Mastery

In today's investment environment there are numerous investment strategies and instruments to trade or invest in but few have the power, leverage, and ability to control risk than stock option trading. In today's markets, online option trading has allowed the common investor or aspiring option trader to have access to this powerful asset class as easily as the veteran trader on Wall Street. Sadly, some would be option traders are intimidated by the seeming complexity of derivatives and avoid them. However, by devoting study to four basic option strategies the aspiring trader can begin to harness their enormous potential and gain mastery over stock option trading formulas. The four option strategies are call position, the short call position, the long put position, and the short put position.

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.

The long put strategy is the inverse of the long call strategy where you are looking for the stock to decline rather than rally. When you buy a put option you control 100 shares of stock in a company and lets you take advantage of enormous leverage. Your reward potential is theoretically unlimited while your risk is limited to the cost of the put option. You must be sure to give yourself enough time to profit with your trading method because time decay works against you with this strategy.

The naked put strategy is implemented when you are bullish on a particular stock or believe that a stock will remain static for a certain amount of time. This strategy allows time decay to work for you and earn income. This is considered an advanced strategy due to the enormous risk if the stock falls in price which exposes you to almost unlimited risk while your reward is limited to the put option premium.

There are over 60 option strategies to trade for huge returns in today's markets and how you use them can be for your advantage but it all starts with these four basic strategies detailed here. By taking the time to see how each of these strategies work in the market individually you will begin to understand how they work in combination with each other. Soon, you gain mastery of stock option trading and how they are implemented to put you in the best position to profit while limiting your risk.

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