The Best Options Strategies To Make Money With Investing Ideas
By | September 1, 2008
Any investor can generate some monstrous returns by finding the right investing strategy for their particular needs. Some of the most straightforward options strategies rely on buying, or going long on a stock. In contrast, selling options is known as going short. If you hold an option, you are known as the long in the options contract. Otherwise, you are refered to as the short in the contract.
Any investor that trades on a call is paying the premium for an option to buy shares of the underlying stock at a certain price point before the expiration date. Generally speaking, a long call would mean that you anticipate the stock covered by the options contrace to appreciate beyond your “strike price”. If this happens, you are able to either sell your option for an immediate profit or you can exercise the option to buy those shares for less than the current market value.
The other side of a long call is called a long put. If you buy a put, you agree to purchase a premium in order to sell shares at a lower price for protit before the expiration date. A long put usually means that you anticipate the underlying stock price will fall below the strike price of the option. If this does occur, then you are able to either sell your option for more than you paid for it, or if you own the actual stock in your portfolio you may sell them at a strike price for more than they are currently worth and make money.
There are certain investing ideas in the options market that remain a little more risky than a simple long call or put. Short options strategies are typically more risky. If you write a call, it means that you are selling someone else the right to buy, and you are agreeing to sell shares of the underlying stock at the strike price before the expiration date. Choosing this strategy means that you anticipate the price of the stock to remain neutral or fall. As long as the stock price doesn’t advance below the strike price that you made the short call at, the option is “out of the money’ and you get to keep the premium. However, if the stock price rises you might choose to buy an offsetting call at a loss in order to prevent greater losses when the holder exercises the option.
Alternatively, if you wrote a covered call, which means that you have the shares of the stock in question already, you could surrender those shares to fulfill your obligation to sell. However, you would be receiving less for them than their market value. If you wrote an uncovered call, which means that you actually do not own the shares, than you would have to buy them at market price first and then sell them for less, at the exercise price, to meet your obligation.
If you are writing a short put, you are giving another investor the option to sell their shares at a strike price any time before expiration to you, and you agree to buy. Short puts are useful if you anticipate a jump in the price of a stock so you can cash in on the premium and expire the put. If the opposite happens, it would be wiser to hedge your bets with an offsetting put so you cut your downside down. Otherwise, the option will almost certainly be exercised and you would have to buy the option holder’s shares for more than the market price.
If you aren’t interested in the former, you might write a cash-secured put. This means that when you write the option, you either purchase shares in a money market account or buy some U.S. Treasury bills (T bills) so that you know you will have the cash available to complete the purchase. Otherwise, your investing ideas might be taking on too much risk in the short term.
Spreading the risk can be a worthwhile trading strategy as well. Spread strategies allow you to hedge against the kind of losses that you might face by simply going long or short. The flip side is that using a spread limits your potential return. Options strategies can certainly be advantageous to investors, [spinand you can really increase your profitability with less risk|because you can make your trades either less risky while maintaining profitability[/spin], or make things more risky with higher upside potential.
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