If you’ve just entered the world of derivative trading, you’re probably eager to make your first option trade. While going after you’ve want can help you succeed, it’s very important that you get a solid foundation before you start spending real money. While there are so many things to get familiar with, it’s absolutely necessary that you know which option trading strategies are there. That being said, we’ve created a list of 6 great option trading strategies every beginner can use.
Covered call writing
One of the best option trading strategies you might want to consider is covered call writing. Basically, it involves using a stock you have or buy to make a profit. The way you make profit is by selling an option to someone to buy your stock at a specified price. Of course, that limits your profit potential, but it also helps you reduce the risk involved as you get to collect a cash premium no matter what happens to your stock. In other words, in case the value of your stock decreases, you’ll incur a loss, but you’ll be better off than if you simply kept it.
Another option trading strategy for beginners is selling iron condors. This is the case because it’s non-directional and has a lot of profit potential. The way you make a profit when selling iron condors is when the stock price remains in the range it was, but the stock ends up getting sold. Of course, due to the low amount of risk involved, gains and losses are usually limited. Another important thing to mention is that when using this strategy, your trades can be as aggressive or conservative as you want.
Cash-secured naked put writing
This trading strategy is all about selling a put option on a stock you’d like to have and choosing the amount of money you’ll be willing to pay for it. So, if you oblige to buy a stock at a certain price, you get a cash premium. If you don’t end up buying the stock, you still get to keep that cash as a consolation prize. On the other hand, if your brokerage ends up having enough money to buy the stock, you’ll be able to do as long as the put owner is willing to exercise the put. In a scenario like this, your brokerage is considered to be “cash-secured.”
Even though this strategy is great for beginners, it’s recommended that you first learn everything you need to know about how to trade options. It involves buying an amount of out-of-the-money put options and selling the same amount of out-of-the-money call options simultaneously. However, all the call and put options are supposed to expire in the same month. It’s an amazing way to lock your profit without having to sell your stock.
Many rookie options traders start by selling put spreads. The market for put spread is huge, which means selling them shouldn’t be difficult. However, again, the amount of money you can make this way is quite limited. With not too much money involved, this can be a great strategy to use while you’re still getting accustomed to the world of options trading. It’s also worth mentioning that you can use this strategy with small trading accounts, which is another big plus.
Married put strategy is one of the best methods for new options traders to understand how it all works. It’s all about buying options on stock you already own and establishing a floor price for the investments you’ve previously made. However, you need to have the volume of assets that are the same as the number of assets there are in a put option. In other words, it helps you protect the stock you’ve invested in. If you’ve just started trading with options, making sure you limit any potential losses, and this might just be the perfect way to do so.
Bull Call Spread
This strategy involves buying call options at a price you want and selling the same volume of calls at a higher price. If you opt for this method, bear in mind that all the call options you use need to have the same expiration dates. It’s best to use this strategy when you have a bullish on a stock, and you expect its price to rise at a moderate rate. The amount of money you’re going to make depends on the closing price of the stock at the point of expiration.
Trading with options is a lot more difficult than it seems. If you want to make sure you succeed as an options trader, considering these 7 strategies as a way to get into the world of options trading is recommended. You’ll learn a lot along the way and eventually, you’ll see your profits start to increase.