Choosing the Best Option Strategy
Jim Graham

Choosing which option strategy to use is one of the most difficult decisions for an option trader. Some seminar gurus push covered calls as the best strategy because it reduces risk but still allows for a profit. Others suggest straddles, because you can make money whether the market is going up or down. If you have traded options for a while, you no doubt have heard many others tout a particular option strategy as the holy grail of trading, the one that will always work and make consistent profits year after year.
 
But the unfortunate truth is that no single trading strategy works in all types of markets. In order to really understand options trading, you need to understand that each option strategy comes with its own set of risks and rewards. Someone who says a particular strategy is superior to another is simply saying they have a preference for a particular risk-reward profile. 
 
But that does not mean it is the best strategy for current market conditions or for your personal risk preference. Be careful of anyone that tells you otherwise. They either do not fully understand options, or are trying to sell you something. Those that claim one strategy is the best for all markets usually focus on only one aspect of the strategy – either the risk or reward side – and completely neglect the other side.
 
The best option strategy to use is the one that directly matches your set of risk and reward tolerances for a given outlook on the underlying. To make the best trading decisions you need to know what market conditions each strategy works best in, and understand the risk versus reward profile of each one. This allows you to reduce each position into its component parts to make sure you are willing to accept the associated risks and tailor the position to match the current market conditions and your outlook.
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