option trading strategies

First, let us define option credit spreads. They are called such because when they are created, they put a "credit" into your trading account, as opposed to a "debit" which normally occures when you are paying for a stock or its derivative. If, by the time the options in the credit spread expire, the share price hasn't breached a certain level, you get to keep the "credited" funds.

The reason it creates a credit and not a debit, is because you're SELLING an option at a strike price which is closer to the current share price, but so as not to leave yourself exposed, you limit your risk by BUYING the same number of option contracts at a strike price further away, both having the same expiry date. The "sold" option, being closer to "the money" (share price), is more valuable than the "bought" option and so you receive a credit.The trick here, is to open the spread with a short time to expiry, thus taking advantage of the "time decay" factor in options. Options have a time decay which falls away exponentially the closer the expiry date approaches, so creating a credit spread with a maximum 4-6 weeks to expiry is where we want to be. Sometimes you can even enter with under 2 weeks to expiry and keep your credit much quicker, but you need to be more certain about the short term direction the share will move to do this, because your time frame is shorter.In today's markets, it is almost impossible to find any investment that offers more flexibility, leverage, and limited risk than stock option trading. Especially at this time in history with online option trading strategies which puts the power of these sophisticated investments at the disposal of both the aspiring trader as well as the veteran trader? Unfortunately, the strengths of these investments are also the biggest obstacles to mastery for most traders as some strategies become seemingly to complex to master by most would-be option traders. However, by understanding the four basic stock option trading strategies you can construct a foundation for trading mastery with stock options. The four basic strategies you must understand are the long call, the short call, the long put, and the short put.