Forex education

Complete Guide to Options Strategies

Option Trading Strategies for Beginners

It is traders of the contract are obligated to fulfill the commitment to buy or sell the underlying asset if the contract is not squared off before expiry. As you know, there are two ways to trade in the stock market, through cash markets and derivatives. While most novice Option Trading Strategies for Beginners traders are familiar with trading stocks in the cash market, derivatives still remain a mystery. In this blog, we will discuss option trading for beginners through simple option strategies. Selling covered calls is perhaps the most basic options strategy there is.

How to trade options successfully?

To become a successful options trader, one must keep the following points in mind:u003cbr/u003e• Select the right strategy for options trading;u003cbr/u003e• It is better to short sell options;u003cbr/u003e •Once the strike price of the stock or index is attained, sell immediately;u003cbr/u003e• Traders holding an unprofitable option should leave it;u003cbr/u003e

This seller writes call options and is betting that prices will fall because she wants to sell the underlying stock above market value. This seller has the obligation to provide the corresponding long position with the underlying shares in the event they choose to exercise their contract. As an example, a trader with a mildly bullish view could buy a call at a lower strike price and sell a call at a higher strike price. Options traders can use equal amounts of either calls or puts to create bullish or bearish strategies with limited upside and downside.

If you’re brand new to the world of options, here are two strategies that you can start with.

NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues.

Option Trading Strategies for Beginners

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. Many options traders use covered calls and cash-secured equity puts and are generally satisfied sticking with those strategies. The important thing is that you find a strategy that you are familiar with , comfortable with , and successful with most of the time (from a P/L standpoint).

Short Call

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. Regardless of the strategy or the number of shares you own on a given stock, you may want to consider starting with small contract positions in the beginning until you gain more experience with options. When you first begin trading options, you may realize that you have additional capital to put to work that may have been tied up with equivalent stock/ETF positions in the past. In essence, to execute a covered call, an investor needs to hold a long position in an asset and then proceed to write call options on the very same asset in order to generate an income stream.

Hence, the position can effectively be thought of as an insurance strategy. If the share price rises above $46 before expiration, the short call option will be exercised (or “called away”), meaning the trader will have to deliver the stock at the option’s strike price. In this case, the trader will make a profit of $2.25 per share ($46 strike price – $43.75 cost basis). The potential loss on a long put is limited to the premium paid for the options. The maximum profit from the position is capped because the underlying price cannot drop below zero, but as with a long call option, the put option leverages the trader’s return. Trading options provides investors with the opportunity to diversify rather than exclusively work with direct assets. While both can be solid investors, variety is the key to a strong portfolio.