4 Basic Option Trading Strategies
In Options 101 I covered option basics and its now time to review the 4 basic option trading strategies that form the underlying foundation for all advanced techniques. In future posts, I will cover each of these strategies in detail.
4 Basic Option Trading Strategies
- Long Call (buy a call option) – Unlimited Reward & Limited Risk – Pay a premium to buy (debit)
- Short Call (sell a call option) – Limited Reward & Unlimited Risk – Receive a premium to sell (credit)
- Long Put (buy a put option) – Unlimited Reward & Limited Risk – Pay a premium to buy (debit)
- Short Put (sell a put option) – Limited Reward & Unlimited Risk – Receive a premium to sell (credit)
Each of the 4 trading strategies listed above has its own risk and reward profile and you must find a balance between the two that suits you risk/reward appetite. Understanding these basic strategies will help you move onto more advanced techniques that professional traders use on a daily basis and be sure to ask questions if you do not understand anything.
If you are unfamiliar with the definition of a call or put option, please refer to the “What are Options” post to review the fundamentals.
