Chapter 11

Increasing Profit Potential and Decreasing Risk

In This Chapter

arrow Reducing risk with options

arrow Combining options for trend trades

arrow Benefiting from strong directional moves

Trading is a conceptually simple event, as prices will eventually rise or fall. That means that you can create a long position to make money when stock prices rise, or you can create a short position to benefit when prices fall. Along the way you may receive or have to pay a dividend here and there, but that’s pretty much it on the trading side. Options give you more choices because you can make money from up and down stock movement, while you have the chance to make money in other ways based on changes in prices.

Consider the additional dimensions that you can add to your trading with options. For instance, by establishing a basic option position, you can gain from upward stock movement (call) and downward movement (put). Either way, your initial investment is usually much smaller than a similar stock position, which is a nice benefit if you have a small account or are an active trader. In addition to single option positions, these securities can be combined to further reduce costs. This chapter ...

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