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Wednesday, November 11, 2009

Project on Option Strategies

Most strategies that options investors use have limited risk but also limited profit potential. For this reason, options strategies are not get-rich-quick schemes. Transactions generally require less capital than equivalent stock transactions, and therefore return smaller amounts - but a potentially greater percentage of the investment - than equivalent stock transactions.
Before you buy or sell options you need a strategy, and before you choose an options strategy, you need to understand how you want options to work in your portfolio. A particular strategy is successful only if it performs in a way that helps you meet your investment goals.
One of the benefits of options is the flexibility they offer—they can complement portfolios in many different ways. So it's worth taking the time to identify a goal that suits you and your financial plan. Once you've chosen a goal, you'll have narrowed the range of strategies to use. As with any type of investment, only some of the strategies will be appropriate for your objective.
Some options strategies, such as writing covered calls, are relatively simple to understand and execute. There are more complicated strategies, however, such as spreads and collars, that require two opening transactions. These strategies are often used to further limit the risk associated with options, but they may also limit potential return. When you limit risk, there is usually a trade-off.
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