Options are financial instruments that provide holders the option to buy or sell an financial security at a indicated price on a future date but not the compulsion to do so.
Call and put agreements are the two main sorts of options trading. When buying a call option, the buyer of call contract obtains the right to buy the underlying asset or security later for a fixed amount known as the strike price or exercise price. A put option contract lets the buyer sell the underlying security at a future price and date.
Let's learn the most successful options strategies that a beginner investor might employ with calls or puts options to reduce their risk.
5 Options Trading Strategies for beginners
Here are five options trading strategies that every investor should know.
- Long calls
The simple long call strategy involves purchasing a call option, or "going long," and betting that the underlying asset will increase in value over the exercise price by expiration.
For example, an investor predicts that Retail Stock will increase in value within a month. The investor thinks Retail Stock, which is presently selling at $10 a share, would rise above $12. The investor could purchase an option with a $12 market price and at least a one-month expiration period. The option's value or "premium" would probably increase if the price of Retail Stock increased to $12 within a month.
A long call is a strategy to bet on a rising stock and make significantly more money than if you held the stock directly if you're not afraid of losing the total premium.
- The Long Put
The difference between the long put and the long call is that you're wagering for a stock's decline instead of its increase. By purchasing a put option, the investor is making a wager that the stock will decline in value before expiration.
An investor purchasing $20 worth of shares in Tech Stock would be an example of hedging. The investor purchases options with an $18 strike price and a two-month expiration because they are likewise concerned about the stock decreases.
When Tech Stock's stock drops to $15 a month later, investors intend to sell their shares to make more money. However, the investor was able to limit their losses as they exercised their right to sell the shares for $18.
- The Short Put
The short put is the total opposite of the long put; in this approach, the investor sells a put or "goes short," betting that the stock will rise or remain unchanged until the expiration, at which point the put would expire worthlessly. The seller will keep the entire premium. The short put can be a bet on a stock gaining like the long call, but there are important distinctions.
For example, Transportation Stock is currently trading at $40 per share. An investor will purchase the shares for $35. Nevertheless, the investor sells put options with a $35 strike price rather than purchasing shares. The investor keeps the premium they earned from selling the puts if the shares never reach $35.
The investor would have to purchase those shares if the option buyer exercised those puts when the price reached $35. But remember that the investor still desired to purchase at that price. Additionally, they have already earned a large premium from trading short put options.
- Covered Calls
Due to its two components, the covered call tends to get complicated. Before selling a call on the underlying stock, the investor must own the shares. The investor forfeits all appreciation over the strike price in return for a premium payment. This strategy bets that the stock will remain unchanged or slightly decline until expiration, enabling the call seller to hold the shares and keep the premium.
The call seller keeps the shares and is free to issue a new covered call if the stock is below the exercise price at expiration. The investor must transfer the shares to the call buyer, trading them at the strike price if the stock climbs above the strike.
For example, XYZ stock is currently trading at $100 per share, and a call with a $100 strike price that expires in six months can be purchased for $10. The call is sold for $1000 in total: the $10 premium multiplied by 100 shares. The investor acquires or already possesses 100 XYZ shares.
- The Married Put
The married put is more complex than a simple options trading strategy, much like the covered call. It "marries" a long put with ownership of the underlying stock. The investor purchases one put for every 100 shares of stock. With this approach, investors can continue to hold onto a stock in hopes of appreciation while protecting their investment if the stock declines. Similar to buying insurance, an owner pays a premium to be protected from the asset's depreciation.
For example, the share price of XYZ stock is $50, and a put with a $50 strike price that expires in six months is offered for $5. The put will cost $500 ($5 premium x 100 shares). The shareholder currently holds 100 shares of XYZ stock.
Bottom Line
Whether prices are rising, falling, or moving sideways, options trading strategies provide a chance to benefit in almost any market condition. The market is complicated and extremely risky, making it unsuitable for everyone. However, the aforementioned guide outlines various trading tactics based on the investor's experience level.
