How to Master Stock Option Trading, Part II

by Billy Williams

When Donald Trump begins to break ground on a new skyscraper the first thing he does is plan his development on building a solid foundation under the planned construction. Without this foundation the building would likely collapse at some point resulting in a loss of time, money, and energy. Successful stock option trading requires the same care and attention when building a foundation based upon understanding option trading basics and strategies. These include a practical understanding of options, strategy when implementing option strategies, risk control, and desired outcome.

While there are literally dozens of effective strategies for directional and non-directional stock option trading all of them can be factored down to just four which are the long call, the short call, the long put, and the naked put. Each of these respective strategies has different risk and reward profiles and all they have their advantages and disadvantages. Study them and understand how they work individually and soon you will be able to understand how they fit together to form varying types of spread positions, hedges, take advantage of volatility, and much more.

Educate yourself on the power of leverage and how stock options allow you to control more assets for less money than just trading stocks. Albert Einstein once remarked that the power of compounded interest was one of the great forces in the universe and with option trading you get superior returns thru leverage that you can compound over and over again. One stock option allows you to control over 100 shares of stock for pennies compared to just trading or investing in the stock itself giving you a much greater risk to reward ratio.

You can also trade for income with stock options thru the use of credit spreads or writing calls. Bull put spreads, bear call spreads, and covered call writing are just a few income strategies. Covered call writing lets you collect premium while you are holding stock in your portfolio for a fairly reliable and consistent income. If the stock gets called away then you gain both the premium and capital gain as your profit doubling your chance to profit while still having limited risk.

Learn how to incorporate the "Greeks" into your trading rationale to help you select the best strategy to achieve your desired outcomes. The Greeks are simply sensitivities of options to various factors, such as price movement, time decay, volatility, and interest rates. The Greeks are Delta, Gamma, Theta, Vega, and Rho and each one gives its own unique indication on the various factors mentioned. These different indicators allow you to exploit things such as stock trends, increased market volatility, low market volatility, time decay, and more.

In closing, I wanted to comment that one time I got to see one of the massive bamboo forests in China and the experience made a profound effect on me and how I view trading. The guide explained to me that when bamboo is planted that it is cared for as long as three years before it first begins to sprout. It is a painstaking crop to nurture yet once it begins to sprout it can grow as much as 2 to 3 feet a day. How is that possible? Because the first 3 years of its life it is building a complex network of roots that lays the foundation for its spectacular growth. By applying the same nurturing to the key areas mentioned in this article you can lay a strong foundation in mastering stock option trading that will help you achieve spectacular growth as a trader.