trading options?

Question

what option strategy offers a combination of the possibility of large reward, with the safeguard of being easy to adjust to protect the money invested?

Answer 1

Here are two sites with some option strategies you can study:
http://www.888options.com/strategy/default.jsp
http://www.poweropt.com/strategymenu.asp

I don't know what you mean by "protect the money invested". Trading options is speculative. There is no guaranteed 100% win strategy. What is important is money management and preservation of capital, so that you can trade again, after a lost trade.

Answer 2

There is always a catch in every option strategy... the more protection you have, the better hedged your position, the lower the profit potential. The lesser the protection and hedging, the higher the profit potential. This is a rule that cannot be changed in trading options.

If you want to use options primarily for protection, then the following strategies applies :

1. Buying the same number of options as you would have buying the underlying stock.

If you have money only for 100 shares than you should buy 1 contract of its option at the money which equivalates to 100 shares. It will cost you only perhaps 10% of the money and will move almost the same amount as its underlying stock. In this sense, if a $50 stock moves up by $5 (10% profit) and you bought its option for $5.00, the option would have moved by about $4.00 (due to option delta) and therefore a profit of about 80% on your money and you would have only risked 10% of your money.

2. Covered Call on the underlying stock.

What this means is for you to sell an equal amount of slightly out of the money call option for every share you own. As you would have made the premium on the sale of the option, that money forms a loss buffer to downside. Example, if you own a $50 stock and sold an OTM option for $0.30, then you would have a $0.30 protection to downside before you start losing money. The drawback is that if the stock moves upwards strongly, the call option you sold would be exercised and your stock would make no further profits then the strike price at which your covered call is sold at.

3. Protective Put.

What this means is for you to buy a Put option for every share of a company that you own. This is akin to buying insurance for your shares for a premium. When the shares drop, the gain on the puts will offset the loss on your stocks, thereby protecting your shares from dropping. The drawback to this protection is that you will gain no more reward than the movement of your shares upwards less the premium that you paid towards this protection.


There are a lot more to option trading than what I have suggested here. Option trading has allowed me to retire young and rich at 28 years old as a stock market millionaire. To see how I did it, please visit http://www.mastersoequity.com . For some really great option trading books that have helped me go from zero to hero, please visit http://www.bestoptiontradingbooks.com


Hope this helps.




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Answer 3

It is natural to want to execute a strategy with low risk and large returns.

Some of my favorite strategies are of those types. While absolutely no risk is not possible, I like to go for 3 to 1 ratio. As in, when I profit, I make sure to earn 300. If I lose, I make sure I only lose 100. So even if I am right only half the time, I still profit.

The strategies listed below allow such profit/loss ratios:

Long Call:
http://www.theoptionsguide.com/long-call.aspx

Bull Call Spread:
http://www.theoptionsguide.com/bull-call-spread.aspx

Collar:
http://www.theoptionsguide.com/costless-collar.aspx

Answer 4

Buying long term out of the money options. For example a 3 month deep out of the money option will mean that your upside can be massive. your downside is the premium you pay.

Answer 5

depends on volatality of underlying price