To build an investment portfolio, there are numerous assets available. Options are such assets and are the most misunderstood amongst all. Here, the assets are brought or sold at a predetermined price and if done correctly, it can be highly profitable for the traders and investors. Options trading is much more complex than investing in the stock market or somewhere else. But all you need is proper research to get started with options trading. In this article, we will discuss options trading strategies for beginners, which will help you get started in the field.
What are the Options?
Options are the contracts that are used by the investors for buying or selling assets at a price that is predetermined over a specific period of time. These assets may be any commodity, security amount, ETF, or index. The name “options” is because the investors have an option to choose when to buy or sell the assets whenever the contract runs out. Investors have to pay a premium amount to purchase options. This is known as the strike price. Further, the investors look for favorable prices to buy or sell the assets at a profitable amount. If the contract expires, the investors would only lose out on the premium amount. There are two types of options strategy:
- Call Options: For buying the assets.
- Put Options: For selling the assets.
What is Options Trading?
The practice of buying and selling the options is known as options trading. One needs to have a strong understanding of the market as well as the ability to predict the ups and downs in market prices to excel in options trading. Investors tend to run towards options trading as they want to make smaller investments initially rather than just investing money in the stock markets.
Options Trading Strategies for Beginners
The best options trading strategies for beginners are as follows:
- Long call and long put: It is nothing but just purchasing or selling the desired assets at desired prices. When holding or stocking a stock, investors and traders purchase options so as to limit their downside risk. A long option is considered as an insurance policy in case if the market view doesn’t turn outright.
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- Naked short call or put: It involves selling or writing an option as naked, i.e. no underlying position is defined for the stock. When the market is bullish or bearish, you can sell put or call options so as to take in premium money.
- Covered call: One can sell call or put options if there has been an underlying short or long position in the assets. In case of stagnant market conditions, the income on the stock holdings is increased by selling the covered calls. This is also called the buy-write strategy. One needs to deliver the underlying position in the contract for options if it ends up being exercised.
Also the payoff profile, in this case, is the same as that in the case of a short option position.
- Bull spread or bears spread: For creating bullish or bearish strategies, equal amounts of calls or puts can be used by the options traders with a limited amount of upside and downside. In both cases, the options will have the same underlying assets and also the same expiration date, in a “vertical” spread.
These are some strategies you need to keep in mind if you’re new to options trading. You need to avoid entering the market without completely understanding how it works. Else, it would lead to huge financial losses. Educate yourself on Options Trading Strategies and then go ahead and start investing. Good Luck!