The Financial Reader

When it comes to stocks there are a lot of important aspects to achieving the ultimate profits. An option trading strategy is a term related to the sale and/or purchase of an open or underlying stock position. There are three primary types of option trading strategies. These include bullish, bearish, and neutral trading strategies. The believed value of the stock is what determines which method the trader will utilize.

Strategies that are neutral are used when the broker is not able to adequately determine the outcome of a stock. These are often called non-directional strategies. There are many different neutral strategies. These neutral type strategies can be used anytime the broker is unable to determine the projected outcome of a stock. Even when the stock broker doesn’t know which way the stock is likely to go some prediction is still merited to determine the volatility of the neutral stock.

Some neutral strategies include: guts, butterfly, condor, straddle, strangle, and risk reversal. These are different financial terms for how to go about getting the stocks and what to do with them after they are acquired. In other words they determine when to sell in and when to sell out.

Bullish strategies are used when a stock trader believes that the underlying stock price will increase. In order to use the bullish strategies properly the trader must predict how high the stock price can go and how fast it will take for it to get there. Once these matters are determined the trader then chooses the bullish strategy that will be implemented.

There are a variety of different bullish trading strategies. The simplest is the call buying strategy. This is the bullish strategy most often employed by new traders.

Stocks do not rapidly increase worth under normal circumstances. This is why moderately bullish strategies are very popular. This method involves a set price for the bull run. The trader then spreads to reduce the cost. This will not decrease the risk but it does help to level out some of the associated costs. The ultimate profit possible for bullish strategies is predetermined but they typically cost the trader less. The bull call spread is one of the many types of bullish strategies.

Bearish strategies are the reversal of bullish type strategies. These are used when a trader is expecting a stock price to drop. An estimate of the time it will take for the stock to drop and how far it will plunge are important to choosing a strategy. There are a lot of different bearish strategies so the broker must choose the correct strategy to ensure success.

Some bearish trading strategies include what is know as the “simple put” buying strategy and the “bear put” spread. The main purpose of bearish strategies are all primarily the same regardless of their title. Bearish traders are aiming to lower to risk in spite of a low profit yield that will likely occur.

Even though the stock is certain to drop most bearish strategies still turn a profit. This is the whole purpose of these strategies, after all. These strategies bring about a profit only when the stock does not go up before the expiration date. This is why it is important to determine how much and how fast a stock will change.

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Filed under: Currency-Trading