In 2019, the stock market had risen by 29% from the previous year. Despite this increase, you need to research widely and be cautious in any options trading. Unfortunately, many options traders often venture into the field without researching the options trading strategies available.
The strategies in options trading can help to maximize the returns and limit risks. If you’re new to the game, educating yourself is necessary. There are thousands of tutorials, forums, and classes discussing options trading.
For first-time traders, some strategies are preferable to others. Here are the best option strategies for beginners.
1. Short Put Option Strategy
In the short put option strategy, investors bet their cash, knowing that the stock will stay flat or rise until that option expires. The trader gets maximum profit, commonly known as the premium, if the put option reaches expiry while worthless. The short put option is one of the most common single options trades.
If you sell a put option, you’re likely to increase your income, as it is quite valuable. With the short put strategy, an investor is cushioned in the case of a flat market. However, investors using this strategy might need to be cautious when selling their puts, as they will be on the hook in share buying when the stock price falls.
The best time to consider the short put option is when you have a high expectation that the stock will rise above the set strike price by the time it reaches expiration. Your broker will ensure that your account has enough equity to purchase the stock if it is put. The put option is a win-win situation, and it can be an ideal starting point.
2. Married Put
The married put strategy involves an investor purchasing an asset like stock. The investor then purchases the put options simultaneously, which has to be equivalent to the total number of shares. When you go for this put option, you have the right to sell the stock at the set strike price, which is usually 100 shares.
Some investors going for married put do so to protect their stock when the risk is high. The function of this options strategy resembles an insurance policy. As such, there’s a price floor establishment to cushion investors in case the stock prices decline.
When making a choice between short put vs. married put, the upsides and downsides of these trade option strategies can be an ideal guide. With the married put strategy, the put tends to increase in value when the stock falls. The hedged position of married put makes investing in this option somehow safer, as you’ll only lose the option cost but not the stock.
As you seek to know what is options trading and how to go about it, understanding when to use a strategy is essential. For the married put, use it when the stock prices are expected to rise before the option expires. The option is also ideal when you expect the stock prices to decline.
3. Long Put
The long put strategy refers to trading, where the trader purchases a going put. The expectation is that the stock price will remain below the regular strike price by the time it expires. Investing in this type of trade means that you’ll benefit from multiples of your initial investment if by any chance, the stock falls to zero.
Nonetheless, the situation is hardly possible as the stock wouldn’t go down below the zero mark. The option premiums, however, increases in value several times. If you’re looking for a simple alternative to bet on a stock’s decline, consider the long put as it is also safer.
The long put, also known as buying puts, is preferable for traders who want to leverage the falling prices. It is ideal if you’re bearish on a given index, stock, or ETF, but you don’t want to expose yourself to high risks.
It would help to research more on calls and puts and the long and short trading strategies. Depending on your expectations, you’ll know whether to go for the long put or the short put. Making informed moves when making option strategies will make all the difference in options trading.
4. Covered Call
When you opt for calls, a naked call option is one of the best strategies. A covered call is a popular strategy due to its income-generating abilities and risk reduction. The only trade-off is that you have to sell your shares at the set short strike price.
If you’re using this strategy, you have to start by buying the underlying stock. The next step involves writing or selling call options on the shares you’ve bought. If there is a rapid increase in the stock price, the long stock position covers the short call.
Investors choose the strategy if their stock position is short-term. With the covered call, you’ll get returns by selling the call premium. It also protects an investor when the stock value declines.
5. Protective Collar
In April 2020, retail sales dropped by 16.4%, which has been the largest recorded decline this year. For those intending to invest in an options trading plan, the news can be scary. A protective collar is an ideal option if the market seems volatile.
The protective collar strategy refers to a plan where the investor buys an out-of-the-money put while writing its call option at the same time. The strategy is often preferable when investors have benefited from substantial gains in a stock market. Thus, investing through this strategy allows downside protection with the long put helping to lock the sale price.
Knowledge of Option Strategies Will Give You Leverage in Options Trading
If you’re a first-time trader, option trading plans might seem complicated. It would help to know the option strategies and how to utilize them. The right information will make you a top-notch trader in no time.
With the variety of option trading strategies available, you’re spoiled for choice. However, it would be best to consult with the professionals to avoid losing your hard-earned cash.
Do you want to venture into options trading? Contact us today to learn the option trading strategy that will guarantee you success.