10 Options Trading Strategies for Beginnners

See covered call options, cash covered puts, and other more advanced strategies to help you in a neutral market. Gain greater insights into covered calls, spreads, and other strategies that may be able to help you during these times. As a trader, it is important to constantly evaluate the amount of risk/reward you have on the table and check to see if it still makes sense for your account.

When it comes to options trading, education and awareness are important for establishing a strong foundation. Chris Douthit, MBA, CSPO, is a former professional trader for Goldman Sachs Option Trading Strategies for Beginners and the founder of OptionStrategiesInsider.com. His work, market predictions, and options strategies approach has been featured on NASDAQ, Seeking Alpha, Marketplace, and Hackernoon.

The short put

Consider a situation where you are bearish and decide to sell 1 call option on 100 shares of stock with a strike price of A. Your downside is potentially unlimited in case the market declines, while your upside is limited to the premium you took in if the market rises. Your breakeven is equal to the strike price of the stock minus the premium paid. Options are a form of derivative contract that gives buyers of the contracts the right to buy or sell https://www.bigshotrading.info/ a security at a chosen price at some point in the future. Option buyers are charged an amount called a premium by the sellers for such a right. Should market prices be unfavorable for option holders, they will let the option expire worthless and not exercise this right, ensuring that potential losses are not higher than the premium. On the other hand, if the market moves in the direction that makes this right more valuable, it makes use of it.

In either scenario, you’ll keep the premium for selling the call option. It’s calculated by taking the strike price ($105) and subtracting the cost basis of the shares ($100) and adding the premium collected ($2). Max gain occurs if the underlying stock price is above the strike price of the short call ($105) at expiration, and you’re assigned. Since the underlying stock price could theoretically rise forever, there’s no limit to how much the call option could potentially be worth. Options trading enable investors to be more dynamic than buying and selling stocks. Traders typically use options to generate income, speculate on future price, and hedge existing positions in their portfolio. Unlike risk defined strategies, naked options require more margin to be held in the account and more capital to hold the position.

Help protect your profits

There’s a variety of strategies involving different combinations of options, underlying assets, and other derivatives. Basic strategies for beginners include buying calls, buying puts, selling covered calls, and buying protective puts. A long strangle benefits if the underlying stock price rises or falls sharply and quickly, ideally above or below the strike prices of the strangle. In addition, if implied volatility rises both options will likely increase in value, all other factors held constant. To the upside is unlimited, because there’s no limit to how high the XYZ’s stock price can rise.

A butterfly spread is a combination of a bull spread and a bear spread and can be constructed with either calls or puts. Like the iron condor, the butterfly spread involves four different options legs. This strategy is used when a stock is expected to stay relatively flat until the options expire. Meanwhile, the maximum loss is the difference between the long call and short call strikes, or the long put and short put strikes, after taking into account the premiums from creating the trade. An investor pays $1 for a call contract and $1 for a put contract. In order for the investor to break even, the stock will have to rise above $12 or fall below $8. This is because we’re taking into account the $2 they spent on the premiums.