Options trading for many people is associated with large profit potential alongside a high level of risk. But, by strategically combining options it is possible to reduce this level of risk below that of the original stock investment and still achieve a large profit potential. It can be be said therefore, that options are the perfect investment instrument for the risk avert investor.
With the help of different options strategies you can, despite what market opinion says about a specific stock or the whole market, earn money if you are right. Or, with the help from a thought through follow-up, unless you are not completely wrong. It is up to you to decide your risk level and thereby your chances to profit.
In this document we will describe a range of alternative ways which options can be combined. We will explain strategies for different market climates, how and when you can realize a profit and finally, provide suggestions on how you can minimise your loss if you are wrong in your market opinion*. For each strategy it will also be shown how you can act to increase or decrease your profit potential and risk level.
To have a high level of control over ones risk exposure, as well as thought through decision rules on when, and how, one should follow up an investment, are obvious to be able to reach long term profits from the options market. Each strategy is relatively advanced and contains options terminology. Therefore it is advisable to first read through the brochure, “10 questions and answers about options - and futures trading”. When you have assimilated the content of these strategies you should be well prepared to profit from the opportunities derivatives instruments offer in different kinds of market climates.
* Please observe that the results of all tables are based on each respective strategy’s expiry day and are presented without any consideration to taxes and transaction costs.
