Stock Trading Option Strategy

An investor who is investing in the stock trading options, always follows a certain stock trading option strategy to make good profits and to make a protection shield against the potential losses. Before making any kind of strategy regarding the option, the investor should always consider the risk factors involved in the process because trading in the stock options is a bit more risky than trading in simple stocks. The prices of the options are determined according to their underlying instruments. These options are used in many combinations.

There are a wide range of options and some of these are:

Covered Call

Protective Put

Collar

Straddle

As an option strategy, the covered call is used by a wide range of investors. The covered call is a process of selling a call for a particular stock which is already in the ownership of the investor. Now, there are two options. Firstly the call is never used by anyone and in that case the premium and the particular stock, both remain with the investor. This gives the investor, the authority to sell another call. Secondly, it can happen that the call is used by someone and in that situation, the investor would be entitled to get the exercise price of the particular stock. It should be remembered that the exercise price of the Stock and the strike price of the call is the same.

Next comes the strategy called Protective put. According to this strategy the investor can buy several protective puts to cover the losses (if any) on the stocks. These puts are of no use when there is a sharp rise in the stock prices and in such situations, the puts expire automatically. On the other hand, if the price of the stock falls, there happens a proportionate rise in the cost of the put. The price of the put increases proportionately with the fall of the stock price, till the stock price reaches the strike line. In this manner the put saves or provides a kind of cover for the losses.

There is an another option strategy which is known as collar. This is a united face of the covered call and the protective puts. Both the upper and the lower bounds are covered by this strategy and it helps the investor to bring down the chances of the potential losses.

Straddle is also a kind of option strategy and it can be created in such a situation when both the call and the put shares the same security. This is also necessary for a straddle creation that both the call and the put are at the same strike rate and also shares the same expiration.