An excellent tool for trading and risk management for the investor is to invest in Option, but through knowledge of strategic planning is the key. Investors have many choices but to invest in option they must know when, how and why to invest in options.
To an investor investing in the option give him the right but not the obligation to buy or sell the particular asset at a specified price or on before the expiration date of that asset. Usually there exist two types of options: First one is: a call, that gives the right to invest to buy the option, and second is put, which gives its holder the right to sell the option. A call is in-the-money when its strike price of the asset is less than the underlying price of the asset, while at-the-money when the strike price of asset is equal to the underlying and out-of-the-money when the strike price is greater than the underlying. The reverse is for the put options. Investor loss limited to the option’s price, or premium when he Purchases the asset while when it is sold the naked option, risk of loss is unlimited.
Options trading strategy help the investor
to predict exact amount of risk while investing in the option and it all depends on strike selection, volatility and time value.
Regardless of the investing strategies used in investing before buying the options, new options traders are always keen on focusing on the strategic use of leverage. If the investor is systematic and plays according to probability it pays a good return on investment in long run. Investor should not focus on buying out-of-the-money options just because they are cheap, they should focus their strategy on -money option spreads that have a higher success ratio.
Covered call also called as Buy-write option in financing term, investor hold longer position in an underlying asset and sell a call against that underlying asset, whereas the market view is bullish on the underlying asset of the investment. On the table of the risk vs. reward front, investor maximum profit would be limited in comparison to maximum loss which is substantial and depends on the volatility. Which if increases, has negative impact, and if it decreases, it has a positive effect.
When the underlying asset moves against you, the short calls offset some of your loss. Options trading strategy aims to match the entire market returns with reduced volatility.
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