Definitions
Strategy
A strategy in the area of options is any investment portfolio consisting of options. Some strategies also include an underlying asset.
A simple strategy includes a single option, for example a Call option.
A complex strategy entails a number of options (including options we have bought and options we have written) together with an underlying asset.
In most strategies, the options expire on the same date and the strategy ends. There are a number of particularly common classic strategies amongst investors.
Market trend
The “market trend” is the price trend of the underlying asset. If the underlying asset is a house, the market trend is: the trend of house prices.
Most of the strategies can be divided into three categories:
- Strategies which are applicable to a rising market.
- Strategies which are applicable to a falling market.
- Strategies which are applicable to a steady market.
Each of the above strategies are supposed to produce profits, if our estimation of the market trend is realized (“successful estimation”). “Failure” will result in losses being incurred.
The smaller the profit we are prepared to accept in case of “success”, the smaller is the loss that we will incur in case of “failure”.
Some of the strategies represent an alternative to buying or selling the underlying asset. In this book, we will describe two of these strategies. If you are interested in extending your knowledge of classic strategies you are advised to refer to our course “Fundamentals of Options Strategies”
The use of the word strategy relates only to options strategies.
