Newbie traders often make the silly mistake of jumping into the world of options trading. It’s not wrong, just a little silly.
It’s like saying, “I don’t know how to swim, but I will go for a dive in the ocean!”
Makes sense, right?
So, to be able to ace an options trading strategy, you need to understand how to build a plan that will fetch you a satisfactory return.
Let’s take the ideal path and begin by understanding options!
What Are Options?
There are four primary words you need to keep in mind:
- Strike Price
Simply put, an option is a contract. With this contract, you get the right to purchase or sell a stock or any other underlying security on the given expiry date, where the price has already been established.
That said, it is your decision on whether or not you’d like to make a sale or purchase of said stock or security. You can rely on a high premium options screener to help you make that decision.
Now, let’s say you were to let the contract expire, then the premium you had paid upfront (when you decided to buy options) will also be lost.
This is where the trading in options comes into the picture.
Options Trading Strategies You Should Know
When a trader sells a call option contract for the stock that they own, they’re locking in the price of said asset. This allows the trader to earn a short-term profit. The risk factor decreases and generates a decent income with the covered call strategy.
Bull Call Spread
Here, the investor will carry out two activities at the same time. They will buy calls at a particular strike price and sell off the same number of calls at a higher strike price than where the purchase was made. Both the call options will have the same expiration date.
This options trading strategy is used when the investor expects only a moderate increase in the prices, meaning they are bullish.
Similar to a bull call spread, the trader will buy a call and put option on a singular underlying asset where both of these have the same expiration date and strike price.
The reason behind using a long strangle strategy is to combat the uncertainty of which direction the price will move.
When using the protective collar strategy, the trader will purchase an out-of-the-money put option and write an out-of-the-money call option simultaneously, where the expiration date and underlying asset will be the same. Investors use this options trading strategy when their long-position stock has made substantial profits.
Along with purchasing an asset, the investor will also buy put options for the same amount of shares bought. This strategy is used when the investor feels like they need to protect their downside risk as they hold the stock. So, even if the stock prices were to fall considerably, the investor would be safe.
Long Call Butterfly Spread
The long butterfly spread strategy using call options combines two strategies, namely, the bull spread and the bear spread, where three strike prices will be considered.
Investors use this options trading strategy when their guesstimate tells them that the stock won’t see a lot of movement.
There are several other strategies that investors use to earn a profit. If you want to become the best, you will have to start from the basics and then move your way up.
The higher the complexity level, the slower you want to make a move.
You must remember that a small profit is better than taking a risk that may bring crazy losses when it comes to trading.
Here’s a list of some other options trading strategies you should have an idea about.
- Bear Put Spread
- Long Strangle
- Iron Condor
- Iron Butterfly
In all certainty, investing and trading is not everyone’s cup of tea. But with a bit of practice and dedication, everyone can gain small profits!
Adrian Collins works as an Outreach Manager at optionDash. optionDash is always looking forward to offering the best covered call and cash secured put screener on the internet. Adrian is passionate about spreading knowledge on stock and options trading for the rising investors.