The Theory Behind the Practice
Everything in life that has significant revolves around some type of order. This order usually comes in the form of an organizational relationship between everything that is done under a unique subject. Organization of your house, organization of your bills, Organization of your clothes, Organization of the items in each of the individual rooms in your house or apartment. Your day-to-day activities would be in total chaos if you did not have them organized in some matter. The world of options is no different. All options and option strategies can be organized in a very simple process of categorizing. Lets take a look at how we can organize options and all their strategies. This organization for the new option trader is extremely essential, as it not only provides a good reference for traders to refer to, but a good reference for option traders (novice or old pros) to understand the relationship of options to all the strategies that can be utilized. In order to organize options in this manner, one need to understand the elements that make up the various option strategies that are currently used.
An elite group of fed up options investors have been taking control of their own financial future. Don't always go for the homerun; click here to find out how you could generate consistent profits:
Two Types of Options and their uses
There are only two types of options, Puts and calls. You can only do two things
with those two types of options. Buy puts and calls or sell puts and calls. So
your initial organization
FIGURE 1-1: PUTS AND CALLS CAN ONLY BE PURCHASED OR SOLD
So in the first step of the organization tree of an option you initially have:
1. A Call, which you can buy or sell
Now, lets take the next step in the organizational tree. You can buy several types of puts or calls based on their relationship to the options strike price relating to the options underlying issues price. They are
1. Out-of-the money options
FIGURE 2-2 BUYING AND SELLING, PUTS AND CALLS, EITHER OUT, AT, OR IN-THE-MONEY OPTIONS
Now understanding the above organization of Calls and Puts you will next come to
see how this organization fits into the current world of option trading.