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What is options trading - Options trading strategies

What is options trading - Options trading strategies

A well-built trading strategy could help big time when it comes to options - or any - trading. 

Chris Douthit from Options Strategies Insider is here to share a detailed intro on options trading strategies extended by Kim Klaiman from Steady Options.

Options trading strategies
What are the best options trading strategies for a beginner trader to approach first?

Let's see Chris Douthit's take from Options Strategies Insider first.

When it comes to trading options, there are an endless number of strategies to consider. The key to being a successful trader is starting with a few strategies, learning how they work, then once you master one, moved to the next. Trying to learn too many strategies at once often leads to confusion, leading to losses within the portfolio.

The three strategies that are beginning options traders should start with are:

  • Covered Call
  • Shot Puts
  • Vertical Spreads"

Covered Calls

With the covered call strategy an investor sells calls against stock they already own. When selling a covered call, the investor agrees to sell the stock already in their inventory if the stock price is higher than the strike price at expiration.

This means you could buy ABC stock for $100 and then sell a 110-strike price call option going two months out for a $5.00 premium. In exchange for accepting the $5.00 premium, you obligate yourself to sell ABC at $110 if the stock trades above that price within the next 60 days.

This makes a lot of sense for several reasons. First, because you received a $5.00 premium, if the stock trades down, you won't start to take a loss on owning the stock until it reaches $95. If the stock were to trade up to $108, you would not only have $8.00 of profit in the stock, but you would still keep the $5.00 premium you received when you sold the call. Finally, if the stock traded up to $120, you would be forced to sell the stock at $110, but you still keep the $5.00 premium you received when you enter the trade. This gives you a total profit of $15. In the last example, you would indeed have made more money if you didn't sell the call option, but this is the only case where that's true, and it's the most unlikely case. Plus, you still made a 15% return in two months, which is an excellent investment no matter how you slice it!

Kim Klaiman, from Steady Options extends Chris' explanation on covered calls with his experience below.

Covered calls and protective puts are among the most popular options trading strategies. A protective put strategy involves purchasing a stock and put options for an equivalent number of shares.

Anchor strategy implemented two important changes. First, it purchases Deep In The Money calls instead of the stock. Second, it sells short term puts in a certain ratio in order to finance the long term long puts.

Those changes allow us to reduce the cost of the protection significantly, and in some cases to get the protection for free.

Short Puts

The shot put, which we discussed in detail in the first part of this article, is another great strategy versus buying stock. Here, investors sell downside puts instead of purchasing the stock itself. By doing so, you receive a premium, which is yours to keep the matter what happens. If the stock stays above the strike price, the premium is yours to keep, and you never take a position in the stock. If the stock trades below the strike price, you still keep the premium, but you will be forced to buy the stock at the strike price.

The short put strategy is often considered a win-win approach to trading. Either you keep the premium, and the cash is directly deposited into your account without taking a position in the stock. Or you keep the premium while buying the stock at a significant discount to where you were first interested. Either way, it's a win for the investor.

Vertical Spreads

Chris Douthit, Options Trading Strategies:

Finally, vertical spreads, an options strategy that involves buying a call (or put) and simultaneously selling a call (or put) at a different strike price but the same expiration. Vertical spreads are a favorite among investors as they reduce risk and the upfront capital of the trade, but they do maximum return.

The vertical spread is an excellent strategy for new traders as it allows them to test and refine their skills without the huge upfront costs of buying calls or put in a single strike price. The vertical spread still allows traders to make substantial returns, which is why it's typically implemented by new and veteran traders alike. When correctly implemented month after month, the profits start to add up rather quickly.

Wrap Up

Options trading can be difficult for new investors. However, for those who learn how to use options to their advantage, which includes researching trades, understanding what is implied volatility, and implementing the appropriate options strategy, the rewards can be substantial. One of the best things about learning to trade options, once a trader learns how to trade options correctly, it's a skill they can use over their entire life

Options trading strategies
Where to look for more?

Where to look for more?

Hope you liked this quick rundown on what options are. If you'd like to go deeper, navigate to one of the articles below:

Author of this article

Bence András Rózsa

Author of this article

Bence András Rózsa is an experienced broker analyst. Having an MSc in international economy and finance, he focuses on equities, cryptos and newcomer financial services. He also has 2+ years of experience within the brokerage industry specializing in stock- and CFD/forex brokers, crypto providers and robo-advisors.

Bence András Rózsa

Broker Analyst

Bence András Rózsa is an experienced broker analyst. Having an MSc in international economy and finance, he focuses on equities, cryptos and newcomer financial services. He also has 2+ years of experience within the brokerage industry specializing in stock- and CFD/forex brokers, crypto providers and robo-advisors.

Everything you find on BrokerChooser is based on reliable data and unbiased information. We combine our 10+ years finance experience with readers feedback. Read more about our methodology

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