You should never jump into options trading without knowing the implications of it and the various things that you can do to make the trades better. You need to know the strategies that are available to traders, if you want to ever have a chance at making things work out within your trade portfolio. It can be easy to get caught up in the problems that come along with options trading, so make sure that you are always following the prescribed strategies so that you do not miss out on the money that you could be making from each of the trades.
To get the best advice on the strategies, you will need to know the terms that are used.
Bull – investor who wants to make the market asset increase. It is someone who buys up the assets and then sells them once it increases. Functions as a traditional type of investor.
Bull spread – when the bulls work to make sure that they are able to get the different things that they want in the options trading. They will often buy up several different trade options, and then they will sell them quickly. They operate as professionals and are often able to predict when there is going to be a change in the market.
Bear – completely opposite from bulls. They look for decreases in the market, and they sell off their options trades in anticipation of the drop in the price. They will then repurchase them at the lower price later on when the prices do go down.
Bear spread – the same thing as a bull spread but opposite on the level that they sell and re-buy the trades that they have worked with before.
Downside – when the hedging tool helps you to limit the loss that you have on your assets. It is often used in combination with options contracts so that you can make sure that you are getting the most out of the other types of investments that you have in your own portfolio.
Vertical – the investor wants to sell and buy at the same time. This usually does not happen exactly at the same time, but it is within a few seconds of the happening that comes along with the trades. It is necessary for investors to make sure that they are losing out on the bad deals and gaining profits on the good options trades.
Collar – another type of protection that will work similarly to hedging and will provide the investor with the security that they need when there is a huge dip in the stock market. By putting a money option into the options trade and then writing the option as if he or she were out of money, they can make sure that they are using the collar to protect themselves.
Straddle – when an investor is riding both of the options that they have. They can actually do this with more than one option, but it is usually difficult to do so especially for investors who are just starting out. They must then make a decision which one they are going to jump on and take the investment opportunity with.
Strangle – the way the investor is able to work with two completely different types of investments. The investor will do all of these different things at the same time, and the intent is for the option contracts to increase in value. Investors should know which direction each of the options are going and they should be confident in the fact that they are doing different things. If an investor does not know the direction that the investment is going in, there are implications that can often cause the investor to lose the money that they have put into the options trades.
Butterfly trading – this is similar to a vertical trade, but it is different in that itis on a much larger scale. It involves using several different options trades and making sure that they are being simultaneously sold and purchased at the same time. An investor will do this if he or she thinks that there is going to be a big change in the market. By selling and buying at the same time, he will set himself up for the changes that are going to come in the market, and it will make things much easier when the change does happen to the market – whether it is a drop or a rise in the price.
If you are able to look at each of these terms and know what they mean in a grander sense, you are then ready to move onto the next chapter. If you feel that you are still not familiar with them, study them and apply them to real world situations.
The easiest way to practice the terms, learn what they mean, who they apply to, and the way that you can use them on your own is to create a practice scenario. Figure out the trading scenario that you want to come up with and label each of the parts of it. If you are confident with your trading terms, you should then try to learn the different aspects of the trades and what they will mean to you.
It is always a good idea to make sure that you are familiar with the basic terminology because that is just the starting point.
While these terms are helpful and they can create a better outlook for you while you are investing, you will be able to learn much more when you start the true trading process. You will quickly find that these are just a starting point and that there are so many more points that you will need to keep track of when you are doing different things in the trading field. Always learn as much as you can and make note of it. Consider keeping these terms handy so that you can use them later on.