V.4:6 (207-208): Succeeding with options part 1 by Leonard Yates

Succeeding with options part 1 by Leonard Yates

An option is one of the most flexible forms of contractual agreements ever developed. Options may be used to take advantage of almost any type of market scenario one can imagine. There are option strategies that can be used to profit from the expectation of increasing, decreasing, or stable prices, or of high or low market volatility. Other strategies may be used to exploit situations where an option may be under- or overpriced relative to other options or the underlying asset. Options are usually available with many different strike prices and terms to expiration on the same underlying asset. Therefore one generally can tailor a strategy close to one's goals.

Although option strategies may be developed that are very diverse in purpose and nature, they all have one thing in common: they are all motivated by the promise of financial reward. Unfortunately, there is no such thing as a "sure" option strategy; for every reward for which the investor grasps, he takes on a corresponding risk. The risks and rewards associated with option trading generally balance when the option is fairly priced. Astute option traders, however, do not look for situations where risk and potential rewards balance; they look for situations where potential rewards seem to outweigh the associated risk.