In today's markets, it is almost impossible to find any investment that offers more flexibility, leverage, and limited risk than stock option trading. Especially at this time in history with online option trading which puts the power of these sophisticated investments at the disposal of both the aspiring trader as well as the veteran trader? Unfortunately, the strengths of these investments are also the biggest obstacles to mastery for most traders as some strategies become seemingly to complex to master by most would-be option traders. However, by understanding the four basic stock option trading strategies you can construct a foundation for trading mastery with stock options. The four basic strategies you must understand are the long call, the short call, the long put, and the short put. 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 naked call strategy, or the short call strategy, is a bearish strategy that is considered to be somewhat of an advanced strategy by most stock brokers. The strategy is used when a trader believes that a stock is going to decline and you allow another trader to sell you a call option which is where you get the premium from that option. You do this because you feel the stock will fall and it allows the other trader to hedge his risk by selling you the call option. Time decay works for you in this trade but your reward is limited to the call option premium while your risk is almost unlimited if the stock rallies. 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 short put strategy, also called the naked put strategy, is used when you are expecting a stock to rise in price or remain at near the same price level for a given amount of time. Your reward is the cost of the put option if the stock rises or remains static but your risk is theoretically unlimited if the stock declines. If it falls in price and hits your stop loss point you must buy back the puts to limit your risk. This is a bullish strategy that is a short term income generator when used properly. 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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