Day trading strategies: the complete guide with all the advanced tactics for stock and options trading strategies. Find here the tools you will need to invest in the forex market

CHAPTER 28:
 
 
Trading With the Trend
Buying Calls
o let’s get started by considering the most basic strategy of all, and
that is buying a call option because you believe that the price of the
stock is going to increase in the near future. Therefore the goal was
buying a call option would be to purchase it at the right moment and then
hope that the stock will go up so much that we are able to sell the option for
a profit. This all sounds simple enough almost like something that you
could never miss. Unfortunately, in practice, it’s actually a lot more
challenging than it sounds on paper.
The first consideration is going to be whether or not you purchase an option
that is in the money or out of the money. If this strategy works maybe that is
not really an important consideration provided that it’s not too far out of the
money. The reason that people decide to purchase out of the money options
is that they are cheaper as compared to in the money options. It’s also a fact
that if the stock is moving in the right direction out of the money options
will gain at price as well.
So if someone tells you that you can’t make profits from out of the money
options they are not being completely honest with you. In fact, you can
make profits but it’s always going to depend on how the stock is moving
and the distance between your strike price and the share price.

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The best strategy to use when going with out of the money options is to
purchase them slightly out of the money by a dollar or two. What this does
is it ensures the price of the option is going to be significantly impacted by
changes in the stock price. Second, you wouldn’t be purchasing a call
unless there was a good chance that the share price would be moving up. So
if you are close in price to the market price, and there is a reasonable
amount of time until expiration, there would be a good chance that the share
price would actually rise above your strike price. If that happens it could
mean significant profits for you.
Of course, you can always take the risk of putting it a little bit more money
upfront and investing in a call option that is already in the money. If the
stock price rises, that is only going to solidify your position. You also have
a little bit of insurance there. That comes from the fact that if you choose a
decent strike price there is a solid chance it will stay in the money and so
even if it doesn’t gain much value you will be able to sell it and either not
lose that much, or still make a profit.
So what are we hoping for with this strategy? The main hope would be that
there is a large trend that takes off so that we can write the trend and earn a
healthy profit. Since options are so sensitive to the price of the stock if such
a trend occurs it’s pretty easy to make decent money. The key, of course, is
getting in the trend at the right time and knowing when to get out of the
position.

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