Options Trading for Beginners

Options Trading for Beginners

Strategies used in options trading have been running the gamut ranging from exotic “multi-legged” beast to more uncomplicated “single-legged” trades. Even so, no matter how complex or simple they are, one thing all strategies have in common is that they are based on the puts and calls fundamentals.

Here are options strategies that are built on the basics of puts and calls. These strategies are what are commonly known as being “one-legged.” It is also worth noting that simple isn’t always an indication of a ‘risk-free’ strategy. All it means is that the strategies are not as complicated as the multi-legged option stratagems.

Long call Strategy

In this strategy, you can “go long” or purchase a call option. It’s a straightforward strategy wagering that an underlying stock will rise higher than the strike price by expiration date.

Why it’s used

Those who are not worried about losing the premium opt for long calls. It is a great way to wager on rising stock, thereby getting more profit instead of having directly owned the stock. This is also a way of limiting risks brought about by directly owning stock.

1.   Long put strategy

This strategy is similar to the long call one. The difference is that you will be wagering on the decline of stocks instead of its rise. Here, an investor purchases the put option hoping that the stock will fall lower than the strike price before the expiration day reaches.

Why it’s used

This strategy is used by traders who can stomach losing the entire premium. The upside is that the trader will significantly benefit when and if the stocks decline. So, if a trader owns puts and doesn’t short-sell the stock, they are bound to earn more. Some traders might also try to bound potential losses by using a long put.

2.   Short put strategy

This is the complete opposite of long put. Here, the investor is “going short” or sells a put. It’s a strategy that wagers that stock will either rise to expiration or remain flat, having the put remain worthless. As a result, the seller gets to keep the entire premium. Short put, just like a long call, can also be a stake on rising stock, but with a substantial difference.

Why it’s used

Short puts are often used to generate income, selling premiums to investors who wager in favor of a stock fall. Put sellers aim to sell a premium and avoid being stuck with having to make a pay-out. Even so, puts should be sold out sparingly because if stocks fall lower than the strike price at the expiration date, they’ll be on the hook.

A falling stock can eat up all premiums gotten from the selling of puts. There are also times when an investor will use short put to bet on appreciation of a stock. More so, if the trade doesn’t demand an immediate outlay. In contrast to a long call, a short put upside has been capped and retains considerable downside if there is a stock fall.

3.   Covered call

Here, the investor must own an underlying stock first then sell a call. When the investor gets premium payment, he will have to give away any appreciation above that strike price. This is a strategy in which stock wagers will either go down below the strike price or stay flat.

Why it’s used

This strategy is a favorite for any investor who’s in search of income generation with little risk. All this while also expecting that the stock will remain slightly down or flat until the option’s expiration. Investors can also use covered calls to get better stock sell prices.

4.      Married put

This is a slightly more sophisticated strategy than the basic options trade. It is a combination of long put with underlying stock ownership (the two are said to be “married”). The investor purchases a single put for each 100 stock shares. That way, the investor will carry on with owning a stock (for the possibility of a rise) while also hedging that position should there be a stock fall.

Why it’s used

This is a hedge. The investor has the married put for when there’s stock appreciation or is getting protection for gains made as they await more.

Conclusion

Options can be compared with stocks. When you buy stocks, you are purchasing a portion of that company (a share). You hope that the company will grow and make more money in the coming days, thus increasing the share price. Should this happen, you have the choice of selling your shares for a profit.