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How to Use Options

Options can be used in a variety of ways to profit from a rise or fall in the underlying market. The most basic strategies employ put and call options as a low capital means of garnering a profit on market movement. Options can also be used as insurance policies in a wide variety of trading scenarios. You probably have insurance on your car or house because it is the responsible and safe thing to do. Options provide the same kind of safety net for trades and investments. They also increase your leverage by enabling you to control the shares of a specific stock without tying up a large amount of capital in your trading account.

The amazing versatility that an option offers in today's highly volatile markets is welcome relief from the uncertainties of traditional investing practices. Options can be used to offer protection from a decline in the market price of a long underlying stock or an increase in the market price of a short underlying stock. They can enable you to buy a stock at a lower price, sell a stock at a higher price, or create additional income against a long or short stock position. You can also use option strategies to profit from a move in the price of the underlying asset regardless of market direction.

There are three general market directions: up, down, and sideways. It is important to assess potential market movement when you are placing a trade. If the market is going up, you can buy calls, sell puts or buy stocks. Do you have any other available choices? Yes, you can combine long and short options and underlying assets in a wide variety of strategies. These strategies limit your risk while taking advantage of market movement.

The following tables show the variety of options strategies that can be applied to profit on market movement:

Bullish Limited Risk Strategies	Bullish High to Unlimited Risk Strategies	Bearish Limited Risk Strategies
Buy Call	Buy Stock	Buy Put
Bull Call Spread	Sell Put	Bear Put Spread
Bull Put Spread	Covered Call	Bear Call Spread
Buy Call Ratio Backspread	Call Ratio Spread	Put Ratio Backspread

Bearish High to Unlimited Risk Strategies	Neutral Limited Risk Strategies	Neutral High Unlimited Risk Strategies
Sell Stock	Long Straddle	Short Straddle
Sell Call	Long Straddle	Short Straddle
Covered Put	Long Synthetic Straddle	Call Ratio Spread
	Put Ratio Spread
Put Ratio Spread	Long Butterfly	Put Ratio Spread
	Long Condor
	Long Iron Butterfly

It is of paramount importance to be creative with your trading. Creativity is rare in the stock and options market. That's why it's such a winning tactic. It has the potential to beat the next person down the street. You have a chance to look at different scenarios that they do not have the knowledge to construct. All you need to do is take one step above the next guy for you to start making money. Luckily the next person, typically, does not know how to trade creatively.