Option Trading Strategies Can Make Investing Safer

Author: William Onedge
All Investments have some sort of risk involved, however, some of the risks of option trading are unique. Option trading strategies may allow the investor some control over the risk. Options allow the investor a chance to limit losses, hedge a long position or receive a premium. Here is a example of a strategy.XYZ has a current market price of $9.80 per share. Sell the option for $.55 per share, or $55.00 per contract. The strike price would be $10.00 per share and the time frame would be for 1 month. Lets say you have 1,000 shares of this stock. You sell these one month options, 1,000 shares or 10 contracts and the stock closes below $10 per share at expiration, you would keep the $550 and also retain the stock, a 5.6% return. If the stock exceeded the $10 per share, your stock options would be exercised and you would receive 10,000, ($10 times 1,000 shares). But, since you only paid $9.80 per share, you would pick up an additional $.20 per share or $200, increasing your profit to$750,a 7.7% return. Now can you imagine doing this 12 times a year? Well that is how many times you can do it with any given stock. This would give the investor between 73% to 92% returns or better, with a minimum risk. Remember you are talking about 10 wins out of 10 tries, with minimal risk. If you stick to this system, it is possible to turn $10,000 in to $155,000 to $216,000 in only 5 years. That would generate a 5 year compounded return of 2,060% or an average annual return of 414%. (2,060% divided by 5) You may ask how can this be? Well it is because the income is compounded, and each year the base amount is increased by the prior years gains. Actually, these monthly gains can be reinvested immediately, resulting in potential higher returns. Option trading strategies can make investing safer.No strategy works all the time, market conditions change and that can make a strategy perform poorly. So it is always better to have more than one strategy to use. Then when market conditions change you can use the strategy that works the best for that change. Option trading is risky but if you only have one strategy and the market is not right. Just stay on the sidelines until it comes back in your favor. That's why paper trading is so important. You have to test your strategies so you know when it is the right time to get in and out of the market. Option trading strategies can make investing safer and provide a great way to enter the market with a small amount of money and because of the leverage options have you can get a very good return on your money. It just takes a little knowledge and some discipline to meet your goals of becoming profitable trader.
If you want to learn to reduce risk and become more profitable visit us at http://www.conservativetrader.com for more information.