Option Strategies Overview

The best option strategies are the ones that most closely match your own personality. Your investment objectives and your short-term and intermediate-term market outlook are important, but they are secondary factors. They are, in fact, products of your personality.

Here's my radical discovery: Align your option strategies with your core nature and you can't help but be successful. That doesn't mean you'll never lose money, of course, but I believe your profits WILL eclipse your losses.

It was intentional that I chose the plural form, strategies. Falling in love with and utilizing just one option trading strategy is as reckless as simply picking one at random. Being well-rounded is essential - in life and in investing.

option strategies overview

Or think of it another way. Great baseball pitchers have more than one great pitch. You can have the world's fastest and liveliest fastball, but if you don't have a good curveball or a good change-up or a good SOMETHING to keep the hitters honest, you won't have a very long career.


Option Strategies Categorized

The good news is that in the world of options--and this website--there are a wide variety of option strategies from which to choose. For me, I find it helpful to divide the strategies into four primary categories:

For a quick listing/link of all strategies detailed on this site, check out the Options Reference page.

  • Hedging Strategies
  • Debit and Debit Spread Trades
  • Credit and Credit Spread Trades
  • Investment Strategies (Leveraged Investing)

You'll note that the option strategies aren't grouped according to your risk profile or market outlook. Just about any option trading strategy can be made to be more risky or less risky.

And I have found that the Bullish-Bearish-Neutral approach to selecting option trades works only in theory.

In actuality, market forecasting, especially in the short term, is an extremely difficult, if not impossible art. Seriously--if you could consistently and successfully tell the future, you'd be rich in no time, with or without options.

I have also come to believe (anecdotally) that most option traders tend to be either debit traders or credit traders. And this, I also believe, is primarily a product of an individual's own psychology rather than being based on short to intermediate term market forecasts.

Interestingly enough, the Leveraged Investing strategies spelled out in The Essential Leveraged Investing Guide--6 customized credit and credit spread strategies designed to enhance long term investments to powerful effect--nevertheless seem to appeal to both debit traders as well as credit traders.



The Strategies

PORTFOLIO PROTECTION/HEDGE STRATEGIES
These are the approaches for when your portfolio has gotten big enough that preserving your capital is at least as important as continuing to grow it. Or maybe you just want to take certain steps to protect it during cyclical downturns. Or maybe you're concerned about a specific holding and would like to shore up its defenses in lieu of selling it (e.g. due to tax considerations). Options always give you options.


DEBIT AND DEBIT SPREAD TRADES
A debit trade is any options trade that costs something to set up. A debit spread is any option trade with offsetting positions which result in a net debit (i.e. the "long" portions cost more than you receive from the "short" portions).

A debit or debit spread trade is successful when the ending value of the options position is more than what it was at the beginning. In some situations, the maximum gain is theoretically unlimited.


CREDIT AND CREDIT SPREAD TRADES
A credit trade is any options trade where you receive a cash premium when the trade is initially set up. A credit spread is any option trade with offsetting positions which result in a net credit (i.e. the "short" portions initially generate more cash than what it costs to purchase the "long" portions).

A credit or credit spread trade is successful when the ending value of the options position is worth less than when you initially set up the trade. Ideally, to achieve your maximum gains, the options will all expire worthless.

Traders interested in option income, or using options to generate cash flow income, generally specialize in credit and credit spread trades.


The Essential Leveraged Investing Guide LEVERAGED INVESTMENT STRATEGIES

My own preferences are for the option strategies I classify as Leveraged Investing. Leveraged Investments are, above all else, investments. They are serious, well-considered, long term commitments, in effect business partnerships with publicly traded companies that you believe will either increase in value over time or will produce a significant and sustainable income stream.

What I term Leveraged Investments are option strategies designed to give your well-considered equity investments an even greater edge as a synthetic version of successful value investing, the acquisition of valuable assets at substantial discounts.

Sometimes you get the discount before you purchase the stock, sometimes you get the discount after you purchase it, and sometimes both. But the end result is the same--you pay less for your stock than do your counterparts, and you make it produce more for you once you own it.

Value investing has never been so sexy.



Some Final Thoughts

Finally, I want to clarify that just because I've divided the option trading strategies included on this website into four categories, I'm not suggesting that there are only four personality types when it comes to trading and investing.

On the contrary, the stock market is an incredibly complex mechanism because it reflects the incredibly complex collective behavior of its incredibly complex participants. But I would suggest that the specific option trading strategies that most appeal to you will tend to congregate in the same category.

If you're new to options, explore the individual stock option strategies in greater detail and find the ones you're naturally drawn to. Give them a whirl. Paper trading options is always a great idea (my own great shortcoming was that I always did my paper trading using real money).

If you're an experienced options trader/investor, consider your own preferences consciously. Is there a pattern? A correlation between favorite strategies and consistent profits? Or do you tend to rely on just one stock option trading strategy? Maybe now's a good time to add some additional pitches to your repertoire.

Finally, if you're thinking about using a paid option trading service (I've used them myself) make sure you consider the three most crucial questions before signing up.



free exclusive value investing with options report




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Warren Buffett Zero Cost Basis Portfolio Current Equity Holdings:

KO - 125 shares
KMI - 100 shares
BP - 100 shares
MCD - 30 shares
JNJ - 25 shares
GIS - 25 shares
PAYX - 25 shares

Open Market Purchase Price: $20,071.83

Less Booked Option Income: $16,341.71

Tot. Discount: 81.42%
Adj. Div. Yield: 19.59%

LEARN MORE HERE