Three Key Options Trading Strategies for Profit
Even though many options investors purchase options and either exercise them or let them expire worthless, there are a majority of investors who actually do not hold their options until the expiration date. Rather, they practice what is known as option trading.
However, when an investor purchases an option, they are essentially considered to be opening a position by buying the option. And, once a position has been opened, there are three primary ways that the investor can close the position.
First, the investor can exercise the option prior to its expiration date in order to either purchase or sell the underlying stock. In its most basic form, if the investor had purchased a call option, they could exercise the option and purchase the shares of the underlying stock for the strike price. This would likely occur if the price of the underlying stock was moving upward, allowing the investor to purchase the stock at a price below its current market value and giving the investor an instant profit.
On the other hand, if the investor had purchased a put option, exercising it would allow the investor to sell shares of an underlying stock at a certain price. Therefore, if the investor owned shares of a particular stock, and the market price of those shares was falling, the investor could exercise their put option to sell the shares of stock and potentially obtain a price for those shares that would be higher than what they could obtain by simply selling the shares out in the market.
Should the investor not exercise their option, they could simply let it expire worthless. This scenario may occur if the price of the underlying stock has not moved in the direction that the investor had hoped. And, it is especially likely that this will happen as the option moves closer to its expiration date and begins to lose its value – rendering it less likely that the investor will find a buyer for that option.
The third way that an options trader can close out their position is by selling the actual option. This is in fact the most popular method that options investors use to close their positions in an option. This method will entail finding a buyer for that option. However, if the price of the underlying stock has moved in a desired direction for that option, especially if the option still possesses some time value, then the investor could actually profit – or at least recoup a portion of their original investment in that option.
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