In option trading, there are 2 basic strategy. The long call or long put. Long call is the perfect strategy beginner. A call is an option to buy stock. When buying a call, you are hoping that the underlying/stock will go up. If you know that a securities have a target price higher than its current price, you might want to buy call. You can sell your option when it reaches its target price. For example stock ABC is trading at $18.72 on May 20,2010. We want to buy the January 2011 $20.00 strike call for $2.24.
This means that the call premium, the risk you are taking is $2.44. You can loss all this money when it reach its expiration date. The reward is unlimited, when the stock price rises you will have more profit. You will breakeven when the stock reach $18.72 + $2.24 = $20.96.
The other basic strategy is long put. Long put is usually cheaper than long call, because stock price tends to move higher. So when you believe stock price will go down, it’s time to buy long put. In put options, the buyer has the right to sell an underlying asset at a particular price and a particular date to the seller. In put options, the writer has to buy the underlying asset at the strike price if the buyer chooses to exercise this option.
Besides those basics strategy, there are more advance strategy like the income strategy. It can generate profit on regular basis, buy combining buy or sell option. This strategy is done by selling put or call option, and buying another option to protect it. This strategy is usually a short-term strategy. The longer the time, the riskier it is. When we are writing option, longer time means higher probalility for the option to go against us. There are numerous income strategy that you can learn like covered call, vertical spread, horizontal spread, diagonal spread, calender spread.