Option Strategies


Option strategies employ options as tools that, when used properly, can greatly increase your alternatives when investing in the stock markets. They allow you "options" that you would not normally have when trading securities:

You can "insure" against adverse market swings. You can position yourself to acquire stock during a market decline. You can position yourself to profit from any market movement: up, down, or sideways. You can profit from market movement without actually putting on an outright securities position.

Option strategies can be classified as directional or non-directional.

Directional means the strategist has a market direction opinion and wants to maximize profits based on that opinion.

Non-directional means the strategist is neutral or has no opinion as to market direction and wants to profit from an anticipated level, sideways, narrow ranged trading scenario, or perceived over/under valued differences among various options.

Option strategies can also be classified as buying premium or selling premium.

Whether the strategist buys options or sells options depends on the implied volatility in the option's price.

Volatility is a measure of the level of "fear" or "uncertainty" present in the market.

When things are going well and everyone is content, fear is absent and volatility is low. At such times, options are "cheap" and should be bought.

As contentment turns into high anxiety, uncertainty, or downright fear, volatility rises and the time value of options increases commensurately, creating an attractive selling opportunity.

The subject of option strategies is, obviously, much too vast and complex for a single page. Indeed, volumes exist on the matter. The leading expert on options, in my opinion, is Lawrence G. McMillan, author of Options as a Strategic Investment and McMillan on Options.

Therefore, to "whet your appetite", on the following pages, I will attempt to present what I feel are some of the most useful strategies, each on its own separate page.

One caveat, however, understand that the list is by no means all inclusive.

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Option Pricing Model

Buying Options

Selling Options

Breakeven or Better Strategy

Butterfly Spread

Iron Butterfly Spread

Condor Spread

Iron Condor Spread

Diagonal Spread

Dynamic Trading Strategy

McMillan on Options

Options as a Strategic Investment

Synthetic Option Positions

Total Return

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