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The following article was published in our article directory on November 11, 2009.
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Options Traders – Advanced Strategies to Help You Make Profits

Article Category: Business

Now that you've had some trading experience under your belt and can call yourself one of the brotherhood of options traders, you want to try some more advanced strategies. If you're ready, here are a couple of advanced strategies for your consideration in your online options trading activities.

In straddling you buy both the call and put option of a stock. Why buy both of them? In simple strategies you expect that the share price of the stock will go either up or down and react accordingly. But what if you're not sure if stock price will go up or down? Then by buying both options you've protected your investment.

To illustrate: a court is set to render a decision on a lawsuit against the Wingnut Conglomerate, but it is unclear which way the ruling will go. At present its stock price is at $105 per share. But this may move up or down depending on what the news will be. So instead of gambling on one or the other option we decide to straddle the fence.

So we buy a call and put option on Wingnut, both with strike prices of $108 (chosen because this is close to the current market value). The premium we paid on the call is $1 per share or $100 (remember that stocks in options are sold in 100-share lots) because it is said to be 'out-of-the-money', meaning the contract is essentially not worth much. On the other hand, the put option is said to be 'in-the-money' because it is worth something, and hence its premium is $5 per share or $500. Our total outlay for the premiums is $600.

Let's say Wingnut wins the case. The stock price then goes up to $112 as investor confidence is boosted by the decision. Your $108 call option is now the one that is 'out-of-the-money' and its premium has dropped to $0.50 per share or $50, while the put option is 'in-the-money' with a premium of $7 per share or $700. We close out both positions for a net profit of $150 ($750 less $600).

You can also attempt a spread strategy. The basic types of spreads are vertical and horizontal. In vertical spreads you buy two options with the same expiration date but different strike prices; in horizontal spreads the two options have different expiration dates. Just as in straddling, you make money through the differences in premiums.

To illustrate a vertical spread: You think the shares of Widget Inc. will go up but only slightly. Its share price is currently at $97. We buy a call option at a strike price of $97 and sell a call option at $100. You pay a total $100 premium for the first option and earn $50 for the second, for a net cost of $50. If the price goes up to $101, then the premium for the call that you bought goes up to $175 while that of the one you sold has risen to $100. You close both positions and earn a profit of $75; your net profit is thus $25 (less the $50 you spent for the first transaction).

Options traders can use these strategies to earn profits, whether the market is bullish, bearish or neutral, as long as they don't keep their hopes too high.

Keywords: option picks, options trading course, stock options trading, option trading online, options traders, online options trading

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