Monday, August 4, 2008

Different option strategies

There is a wide variety of different option strategies, each with their own advantages and disadvantages. Below is a list of the different things you can do with options.

1. Buying short term options. This can be beneficial if you believe that a stock is going to make a big move anytime soon. This strategy is not for the long term but seeks to take advantage of sudden swings.

2. Buying Leaps. Unlike short term options the leap is said to take advantage if the longer term prospective on a stock. Because a leap is normally one to two years out you would have a long term perspective with the power of leverage on your side as well.

3. Selling short term options. This strategy tries to capture an income from the market by Selling out of the money options and collecting the premium. As long as the stock does not go past the strike price of the option the option would expire worthless and you would walk away with the premium.

4. Selling covered calls. This is similar to selling short term options. There are only two major differences. The first one is that you are limited to selling call. The second is you buy the stock first so that if the stock goes above your strike price and you have to sell you do not have to buy the stock at a higher price and sell it at a the strike price of the option. You already have the stock so you will just sell what you already own.

5. Forming a diagonal spread. This is similar to the covered call strategy. The only difference is that you buy the leap or the right to buy a stock at a given price and sell short term calls. If you get called out you can buy the stock with the leap and sell it.

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