Basic Option Trading Strategies Tips
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How to buy a put
Just as call buying is the most basic options trading strategy you can employ when expecting upward movement in a stock, put buying is the most basic options trading strategy at your disposal when you expect a stock's value to drop. By purchasing a put, you are investing in the belief that a particular security's value will fall below a certain price by the option's expiration date.
Here are a couple of things to keep in mind when buying puts:
Puts can allow you to profit from a downward move in an equity.
Since you are buying an option, you have the right, though not the obligation, to sell the underlying shares at the strike price. Thus, you do not have to own the shares to buy a put. Only if you exercise your put option would you have to go out in the open market, buy the shares, and then sell the stock at the contract (strike) price. Bear in mind that you will incur two stock commissions - one to buy the shares and one to sell them to the put seller.
The simplest alternative to capture a profit is to sell the put for a gain after a decline in the stock.
How to buy a call
Buying a call is the most basic options trading strategy that you can utilize when expecting an upwards price movement in a particular stock. There are many different methods for choosing an underlying security, but when you buy a call, you are essentially saying that you believe that the underlying stock's value will increase before the option's expiration date.
A couple of things to keep in mind when buying calls:
Options closer to expiration will cost less but also have less time to make the desired price move.
In-the-money options may be more expensive than out-of-the-money options, but out-of-the-money options have no intrinsic value, only time value.
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