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3 Popular Options Trading Strategies

Posted by Pete Stolcers on February 1, 2010

Option Trading Question

How do I choose the best trading strategy?

Option Trading Answer

When you are getting into stock options trading, it can be a bit overwhelming with how many different strategies are out there and you may have a hard time trying to pick the ones that will work best of you. Instead of going mad while looking at the long list of options, stick to the basics and use the three main option trading strategies until you are more comfortable with the market and know how you want to do things. Many traders have used just these three strategies for their entire experience with option trading.

Stick to Underpriced Options

If you only buy underpriced options, you have two advantages. First, you risk less money when you buy a cheap one.  Second of all, if the stock crosses the strike price before it expires, you can win not only your bet, but also your percentage gains will be quite a bit more than if you had bought a more expensive option.

Diversify

Never put all of your eggs into one basket with options trading. The best way is to take at least two positions and then buy at least four contracts per position. This reduces the commission costs and will definitely reduce your risks.

Minimize Your Risks!

This may seem like a bit of a no brainer, but reducing your risk in anyway possible is probably the best strategy of all. Pay as little as possible for each option. Always try and have some of your bets for both bullish and bearish scenarios because this will reduce your risk. Another way to reduce your risks is to always be ready to cut your losses if you have to. It is sometimes better to cut them at the beginning of a dive and lose a little than to try and ride it out and lose a whole lot more.

Options trading can be a scary thing to get into, but following these three strategies can help you become successful with option trading.

Option Trading Comments

  • On 02/24, Sam said:

    Hi I just wanted to know how does one go about finding out “underpriced options” ?

    What are the guide lines for doing this?

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