Explaining about Option Strategies, Credit Spreads & Day Trading

Options trading can be very involved and complicated, but basic option strategy falls into a few main categories. To understand these strategies, it's important to have a grasp of the possible positions a trader can hold in the options market, and what type of strategy they can execute. In order to understand Option Strategies, it's important to understand what types of transactions are possible. The two types of options transactions at the simplest level are called calls and puts. When a buyer purchases a call, they are buying the right to purchase the underlying asset at a pre-determined price at any time during the agreed upon period of time. When purchasing a put, on the other hand, you are buying the right to sell at a pre-determined price.

What are Credit Spreads?

The vehicle many pros use to obtain a stream of monthly income no matter which way the market goes is the Option Spread, the simultaneous purchase and sale of a pair of Call options (or of Put options) with different Strike Prices that expire the same month. When we collect more for the option we sell than we pay for the one we buy, the net amount we collect for the spread is our net Premium, and it represents our income from the trade. This kind of spread is referred to as Option Credit Spreads, and is an ideal technique for generating a recurring income stream.

The Major Elements of Option Spread:-

The three key elements of every option spread are: Strike Price, Premium, and Expiration Date. Thus selecting optimal values for these variables your entry criteria is what the investor does to maximize the likelihood of a successful trade.

• Strike Price: Every option has a Strike Price, the predetermined price at which the buyer of a specific future month's Call options has the right to buy a fixed number of shares of the underlying stock.

• Expiration Date: The exercise of the right to buy or sell the underlying stock or index at the Strike Price ends on the Expiration Date of the option, usually the third Friday of each month.

• Premium: This is simply the price the option is trading at when you buy or sell it. If you are buying an option, you are paying the premium; if you are selling the option, you collect that premium.

Day Trading:-

This means buying and selling the stocks on the same trading day. The trading positions, usually though not always, are closed before the market closes for the trading day. Day Trading is different from after- hours trading where the trading activity continues even after the regular marketing hours when the stock exchange closes. Sellers and buyers who participate in day trading are called day traders. Although day trading evokes the image of a hectic trading activity in course of the trading day, it may not be so in actual practice.

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