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The Four Building Blocks of Stock Option Trading Mastery

In today's investment environment there are numerous investment strategies and instruments to trade or invest in but few have the power, leverage, and ability to control risk than stock option trading. In today's markets, online option trading has allowed the common investor or aspiring option trader to have access to this powerful asset class as easily as the veteran trader on Wall Street. Sadly, some would be option traders are intimidated by the seeming complexity of derivatives and avoid them. However, by devoting study to four basic option strategies the aspiring trader can begin to harness their enormous potential and gain mastery over stock option trading formulas. The four option strategies are call position, the short call position, the long put position, and the short put position.

A call option, or long call option strategy, is a bullish strategy that a option trader uses when he sees an upward bias in a company's stock. One call option allows you to control up to 100 shares of the company's stock and your reward potential is theoretically unlimited. His risk is limited to the price of the call option he purchased though however an option trader must factor time into his investment decision because time decay works against his position as the expiration date for his call option approaches.

The short call strategy is also called the naked call strategy and is implemented by allowing another trader who is the owner of a given stock to sell you the cost of a call option or the option's premium. This is an advanced bearish strategy that lets you generate income by allowing time decay to work for you if the stock falls or remains static. Unfortunately, if the stock rallies you are theoretically exposed to unlimited risk so you must have a stop point and if that is reached then you must buy back the call options to limit losses.

You implement a long put strategy when you are bearish and are looking to exploit a downward directional bias in a stock. You buy a put option which allows you to control 100 shares of a stock and take advantage of the high leverage that put options allow. Theoretically, your reward is almost unlimited with this strategy and your the most you can lose in a worse case scenario is the cost of the put option. This is a bearish directional strategy and time decay works against you so be sure you give yourself enough time to profit with your trading system.

The short put strategy is used if you are bullish on a stock or believe is will trade at the same price level. This is also similar to the short call and has the same implementation except you allow someone to sell you a put. You stand to gain short term income from the premium and time decay works for you as you approach the expiration date while the stock goes higher or stays at the same level. This is also considered an advanced strategy and you must be sure you have enough experience trading options before attempting to trade this strategy without a hedging position.

By taking the time to understand how each of these strategies work in a variety of market conditions you will begin to gain the foundation to master implementing them in combination. These incredibly effective risk reducing, profit enhancing instruments allow for over 60 different stock option trading strategies but all these combinations begin with these basic four strategies. As you gain mastery over how to coordinate them you will be able to put yourself in the best position to profit while maintaining the ability to limite your risk. Good trading.

Article Source: http://www.articlebankonline.com

Click here and read more stock option trading mastery lessons and click here to read one of the most effective trading methods for trading momentum stocks and options today!

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