High-Powered Investing All-in-One For Dummies, 2nd Edition

Chapter 3

Basic Trading Strategies

In This Chapter

Covering the basics of trading on margin

Introducing call option strategies

Incorporating put option strategies

A main reason investors choose options as a trading vehicle is that they give you leverage while limiting risk. The simplest option strategy is buying call options, because the upside potential is theoretically limitless, while the downside risk is your option premium. This is usually the first strategy that beginners use when they enter this sector and is best used when you're expecting the underlying asset to rally.

A second use of call options is option writing. In this case, you're looking to protect a long position by selling a call option to someone and collecting the premium. Option writing works better in markets that are falling or moving sideways. You're hoping that the underlying market goes mostly nowhere and that the option expires worthless, while you pocket the premium.

Put option strategies are another alternative. Generally useful in falling markets, they tend to be riskier than call-related strategies. When you buy a put option, you accomplish essentially the same thing as short selling without some ...