What is Options Trading? 5 Strategies That Work

What is Options Trading? 5 Strategies That Work

New traders will often jump into options trading without having much understanding of the different strategies that are at their disposal. It’s worth knowing that there are a variety of trading strategies that can both maximize return while limiting your risk. With just a little effort, a trader can learn how to take advantage of the power and flexibility that stock options can provide.

Are you interested in learning more? Then continue reading and we’ll walk you through some of the best options trading strategies that you need to know about!

1. Covered Call

When it comes to making calls, one strategy is just to simply purchase a naked call option. You can also structure a basic covered call or buy-write. This is a well-known strategy that can help you reduce risk and generate income while being long on a stock.

The catch here is that you have to be okay with selling your shares at a certain price – the short strike price. In order to do this strategy, you buy the underlying stock like you normally would and write a call option on those same shares at the same time. 

For example, let’s imagine that you’re using a call option on a stock that represents one hundred shares of stock per call option. For every hundred shares of stock that you purchase, you would sell one call option against it simultaneously. This is known as a covered call because your short call is covered by the long stock position. 

This is a good strategy to employ if you have a short-term position on a stock and a neutral opinion on where it’s going. It’s also a good way to generate income by way of the sale of the call premium. 

2. Married Put

When you execute the married put strategy, you buy an asset (for example, shares of stock) and purchase put options for an equivalent number of shares at the same time. The holder of this put option then has the ability to sell stock at the strick price. And each contract here is worth one hundred shares. 

You might want to utilize this method if you want to hedge your downside risk while you hold a stock. This is kind of like an insurance policy. You have a price floor just in case the price of the stock happens to fall dramatically.

As an example, imagine that you purchase one hundred shares of stock and you buy one put option at the same time. You might find the married put option enticing because you’ll be protected to the downside, in the event that the stock price should undergo a negative change. 

At the same time, you’d be able to participate in all of the opportunities if the stock goes up in value. The main downside to this strategy is that if the stock doesn’t fall, you’ll lose the amount of the premium that you paid for the put option. 

3. Bull Call Spread 

A bull call spread strategy is when traders purchase calls at a certain strike price while also selling that same number of calls at a higher strike price. Both of these call options are going to have the same underlying asset and expiration date. 

This kind of vertical spread strategy is usually used when a trader feels bullish on the underlying asset. That trader then expects a moderate increase in the price of the asset. When you use this method, you’re able to limit your upside on the trader while also lowering the overall premium that’s spent. 

4. Bear Put Spread 

Acting like the opposite of the bull call spread, this strategy is another kind of vertical spread. With this method, you would purchase put options at a certain strike price while also selling that same number of puts at a lower strike price. And you would do all of this simultaneously.

Both of these options are bought for the same underlying asset and they also share the same date of expiration. If you have bearish feelings about the underlying asset and you think the price of the asset is going to go down, then you may want to use this strategy. Here, you’ll end up with limited gains as well as limited losses.  

5. Long Straddle

A long straddle options strategy takes place when you buy a put and call option at the same time on the same underlying asset. They will also have the same expiration date and the same strike price. 

You would want to use this kind of strategy if you think that the price of the underlying asset is going to move significantly out of a specific range, but you’re not sure which direction that move is going to be in.

In theory, this method should give you the opportunity for unlimited games. Yet the maximum loss that you can undergo will be limited to the cost of both options contracts combined.

The Importance of Knowing These Different Options Trading Strategies

Options trading is a great way for investors to maximize their gains while hedging their risks. However, you shouldn’t just jump right into options trading without first knowing some of the basic strategies. By following the strategies above, you’ll be better able to set yourself up for success.

Just make sure that you have a thorough understanding of how options trading works and what each strategy is meant to do. When you do that, you’ll be amazed by how much more enjoyable your trading becomes.

Are you looking to really improve your options trading success? If so, then enroll with us today and see what we can do for you!

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