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OPTION STRATEGIES PART - 2

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OPTION STRATEGIES PART - 2 We will examine four market outlooks with trading strategies corresponding to each: Bullish -  The expectation of an increase in price. This category has two subcategories: * Moderately bullish-Although the outlook is for higher prices, the increase is not likely to be dramatic. * Extremely bullish  - Expecting a dramatic, explosive increase in price (generally anticipated to occur in the short term) Bearish -  The expectation of a decrease in price. This category has two subcategories : * Moderately bearish - Although the outlook is for lower prices, the decrease is not likely to be dramatic. * Extremely bearish - Expecting a dramatic sell-off in the stock (generally anticipated to occur in the short term) * Neutral (front spread) - Expecting little price movement over a given time period. Neutral strategies enable the trader to make money in a market where prices remain the same or move little. * Volatile (back spre

OPTION STRATEGIES

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OPTION STRATEGIES Options allow the investor to sculpt the returns in their portfolio. When you buy a stock and the price rises $1, you make $1. You lose $1 if the price declines $1. Your profits are linear and directly related to only the change in the price of the stock. Interest and dividends will make a slight change to the outcome though these factors are also linear. Options blow apart this linearity. Options are called convex instruments because the returns are not linear but curved. We saw that in the previous chapters. You can literally create millions of possible returns through the use of options. You can mix and match options to create just about any return possible.   Selecting a strategy is a multi step process. You should go through a systematic process before initiating a trade. Each step should lead to further refinement of the strategy. It can be very dangerous to your bank account to disregard some or all of the major factors that affect options prices.