Strategy Guide

Options trading can be a part of almost any trader's arsenal.  Trading strategies involving options can accomplish a surprising number of investment goals including:

• Leveraging equity positions
• Speculation
• Generating income
• Protecting existing profits
• Setting contingent prices for entering the market
• Insuring existing equity positions against dramatic
  downward moves in the market.

The facing table shows various uses for each of the more common option strategies.

LEARNING TIP:  Experiment with different option strategies based on an underlying trading goal.

Strategic Use of Options

Alternatives to Speculation

Options are considered risky and most often are used for short-term speculation.  However other strategies should not be discounted.  Covered calls can generate regular, steady income and cash-secured puts (short puts) often can create contingent buying (or selling) conditions.  Buying puts can also be a good way to protect against stock market meltdowns.

Volatility option trades (straddles and strangles) are used when events have the potential to cause big changes in the VIX index (option volatility index).

Neutral sentiment trades are useful when you feel that things will not change much one way or another.