Option trading is influenced by a variety of factors; keep in mind that the performance of options reflects the stock market. The surest method to increase and safeguard your investments with option strategies is as a supplement to your greater portfolio of mutual funds as well as stocks.

Option trading can increase the level of diversification in your holdings. By looking at what you already own in your long term portfolio and reviewing various factors to narrow your purchase possibilities, you can select which positions will benefit you the most. You need to take into consideration not only overall market sentiment and volatility, but also the fundamentals, mcad indicator, technical analysis and stochastics.

Let's say you already posses a lot of biotech stocks or a biotech mutual fund. It wouldn't be prudent to buy additional biotech-based call options. If biotech stocks rally, you'll already have ample exposure to benefit. In fact, you will likely be better served by purchasing a few biotech-based put options.

Remember, one of the most basic tenet to understanding option strategies is knowing that put options will profit if, in this case, biotech stocks take a sudden nosedive. These profits can help offset some of the losses you'll experience in your stock and mutual fund portfolios. Conversely, call options profit when a stock, index or sector move up and they can act like a surrogate for stocks.

When most people consider option trading as an activity to supplement longer term holdings, they associate this with the speculation, risk and potential for extremely fast profit that has been seen to occur in many cases. While that can be true if you choose short-term options and rapidly buy and sell, if you pick your spots carefully and with thought you can actually increase your returns while lowering your risk.

Remember that options have a variety of uses, and to use option trading as a method for speculating and making a highly taxed fast buck is not the most profitable way to go. Professionals use option trading as a means of hedging risk and to bolster profit in the underlying stocks they hold. It is important to remember that option trading can be a means to many ends including income generation, profiting from short-term market fluctuations, protecting assets you already have, or making long-term tax-efficient gains.