6 Option Trading Strategies you should know.
The process of trading options can be more complex than navigating traditional stock trading, but that is often because investors approach options without a real strategy in mind. The key to successfully trading options is learning about the various ways to invest before jumping in. Many investors try to learn as they go — leading to confusion and, in many cases, portfolio losses.
The process of trading options can be more complex than navigating traditional stock trading, but that is often because investors approach options without a real strategy in mind. The key to successfully trading options is learning about the various ways to invest before jumping in. Many investors try to learn as they go — leading to confusion and, in many cases, portfolio losses. The following list should guide you through some of today’s best options trading strategies for beginners:
1. Long Call
2. Long Put
3. Short Put
4. Covered Call
5. Married Put
6. Protective Put
1. Buying Calls Or “Long Call”: Buying calls is a great options trading strategy for beginners and investors who are confident in the prices of a particular stock, ETF, or index. Buying calls allows investors to take advantage of rising stock prices, as long as they sell before the options expire. This strategy helps to minimize overall risk when trading options. The potential loss is only the premium paid to buy the contract; however, the potential profit is unlimited depending on how much shares rise in price.
2. Buying Puts Or “Long Put”: Buying puts is similar to buying calls, except investors hope the asset will decrease in value rather than increase. Investors typically utilize this strategy as an alternative to short-selling because the risk is significantly smaller. When buying puts, investors are only risking the value of the premium if the asset were to rise past the initial strike price. Depending on the size of the premium, buying puts can be a low-risk way to take advantage of falling prices.
3. Short Put: The short put is a trading strategy for beginners and investors who are selling options. This strategy aims to profit from premiums paid on options contracts. Let’s say Investor A is implementing a short put strategy and sells a put option to Investor B. If the price of those shares stays the same or increases, Investor B will likely let the put contract expire. After the contract expires, Investor A would keep the initial premium, thus profiting from the transaction.
4. Covered Call: The covered call refers to a two-part options trading strategy. First, an investor must own underlying stock in a company. Then, they must sell a call on that stock and receive a premium. In a covered call, the investor is hoping that the stock will remain the same price or slightly decrease — pushing the buyer of the options to let their contract expire. This will then allow the investor to keep the premium money they received. This strategy is common among investors hoping to generate income from stock ownership while share prices remain roughly stagnant.
5. Married Put: The married put gets its name by combining two investment strategies: stocks and options. These investments will be made simultaneously, with investors buying one put option for every lot of shares of stock they purchase. If you remember from above, a put hinges on share prices decreasing. Therefore, in a married put investors are attempting to insure themselves against a loss in share value. When done correctly, this strategy is used to offset portfolio losses while waiting for stock prices to increase.
6. Protective Put: A protective put is another strategy used by investors to protect themselves from potential losses. Investors would buy a long put against an asset they already own, which offers protection if the asset were to decrease in value. The difference between a protective vs. married put is that a protective put is used to minimize losses from an asset you already own, whereas a married put protects assets you are buying simultaneously. This strategy is commonly used when investors are expecting a short-term decrease in share values.
More Options Trading Strategies Beginners Should Know When it comes to successful options trading for beginners, the more you know the better. By familiarizing yourself with the available strategies you can set yourself up to make better investment decisions in the long run. Here are a few other options trading strategies to guide your research: ·
Long Straddle Strategy: This is when investors buy a call option and put option at the same time, each with the same strike price and expiration date. The goal is for the profits of one contract to offset the loss of the premium from the other.
Bull Call Spread: With this strategy investors will simultaneously buy calls at one strike price while selling the same number of calls at a higher strike price. This is used when investors expect the price of the asset to increase moderately.
Bear Put Spread: The bear put spread is another vertical trading strategy, used by investors who expect an asset’s price to lower in value. To implement this strategy investors will purchase put options at a certain strike price while selling the same number of put options at an even lower strike price.
Protective Collar Strategy: The protective collar strategy is when investors buy an out-of-the-money put option while writing an out-of-the-money call option at the same time. (An out-of-the-money option describes when the underlying value of an option is lower than the strike price). This is often used for protection after a stock has experienced significant value increases.
Long Strangle: This strategy sees investors buying both an out-of-the-money put and call option with the same expiration date. The long strangle is used when investors are unsure whether a stock will dramatically increase or decrease in value.