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When you open a new option trading position, you probably have a certain idea about the future stock price movement. You bet that your idea is right and prefer to minimize your loss if it turns out to be wrong. The most common bets are related to the stock price changes (upwards or downwards with many grades– very, modestly, etc.). The bet on volatility change is also very popular.
Options as financial instruments offer absolutely unique possibilities of “fine tuning” risks and rewards. First of all, you can always select the most suitable option strategy that better fits your opinion about the expected stock price move. Second, you can choose the strike, the expiration date and, finally, the underlying stock, to find the most suitable risk/reward ratio. If you want to play the risky game, you should be fairly compensated.
According to the game theory, any complex situation of decision making in uncertainty can be simplified and considered as a simple lottery, defined by a set of possible outcomes (wins or losses) per one dollar invested and their probabilities. State-of-the-art computer systems allow to scan more than 200,000+ various options (for 2,000+ optionable US stocks), multiplied by a dozen of option strategies (2+ million of different trading possibilities) and compare all of them from the point of view what return per $1 invested you can expect and how much risk you have to take.
Regardless of your personal preferences, no matter what option strategy, industry or time horizon you might prefer, the OptionSmart Trading System provides you with an exceptional tool. Being able to compare over two million trading possibilities and to single out a handful of high quality (in risk/reward terms) option picks for further matching with your individual preferences, is a truly new way of trading, which has not been seen before.
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YOUR EXPECTATIONS & SUGGESTED STRATEGIES |
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You ‘re very bullish >> buy call
You ‘re moderately bullish and you are sure the price will not fall >> bull call spread or bull put spread
You ‘re moderately bullish and you think the price will not fall >> sell naked put or sell covered call |
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You ‘re very bearish >> buy put
You ‘re moderately bearish and you are sure the price will not rise >> bear put spread or bear call spread |
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You expect prices to be very volatile >> buy straddle
You expect prices to be volatile >> buy strangle
You think the price will not fluctuate much >> buy butterfly
You expect prices to be moderately volatile >> sell butterfly |
OPTION STRATEGIES COMPARISON
RISK VS. REWARD
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REWARD LIMITED |
REWARD UNLIMITED |
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RISK LIMITED |
Bull Spread, Bear Spread,
Buy Straddle, Buy Strangle,
Butterfly Spread |
Buy Call, Buy Put,
Buy Stock +Buy Put |
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RISK UNLIMITED |
Sell Covered Call,
Sell Naked Put |
Buy Stock |
© "Worry-free Option Trading System" & Stock Markets Institute, 2002 |
