There are numerous investment instruments available in the market, and one of the least understood ones is Options. Options contracts can yield good returns when done right. The catch is there is no one way ofgetting it right. This makes options trading appear complex to investors when compared to other trading strategies. However, this should not be a deterrent. Trading in options can be tackled easily with sound research and understanding of strategies to maximise returns when making stock market investments.
The basic options trading strategies for beginners
Options trading is the practice of buying and selling options in the market. An options contract is a type of financial derivative instrument that derives its value from an underlying asset, usually stock. Such a contract gives the traders the option but does not impose the obligation to buy or sell the underlying asset at a specified price during a specified period.
Options trading for beginners is not as difficult a task as it is perceived to be. All that is needed to crack it is understanding the basics backed by online research and coming up with a solid trading strategy. Here is a list of some good options strategies for beginners:
- Long call
If an investor is bullish on the markets and believes that the market prices will rise (referred to as ‘spot price’), they may buy a call option. Call options are derivative contracts that give an investor the right to buy an option at a predetermined price, called ‘strike price’ against a premium. If the spot price goes up, the difference between the strike price and the spot price, net of premium, will be the investor’s profit.
- Short call
Conversely, the short call is meant for investors who expect prices to fall. An investor will sell call options or go short on calls when they expect prices to fall. They restrict profits to the option premium received.
- Long put
This is for investors with an opposite view— bearish on the markets and expect the spot prices to fall. Put options give investors the right to sell at a strike price over a set period. When the spot prices decline further, the investors make a profit by selling at the strike price.
- Short put
This is used by investors with a bullish perspective. The maximum profit through this strategy is the premium paid. For instance, investor A sells a put option to investor B. If the price of the underlying asset increases or remains the same, investor B will let the contract expire, forgo the premium, and still profit, as the strike price is higher than the spot price.
- Married put
In this options trading strategy, an investor at the time of a stock purchase buys a put option on the same stock as protection against a decline in the stock’s price. Doing so, the investor restricts their loss to the premium.
- Protective put
Another capital conservation strategy used by investors is buying a put against the underlying asset they already own. The difference between these two strategies is the purchase timing—a married put is bought when purchasing stocks, unlike a protective put, which protects the stocks already owned.
These are six basic options trading strategies for beginners, where the idea is to minimise losses and risks when deciding on the stocks to buy today. Apart from these, there are a few other strategies too. But what helps in options trading ultimately is being organised with a probability-oriented approach. Regardless of the strategy, the two determining factors are market knowledge and understanding your goals and aligning the two.
If you are looking to invest in the stock market today but are still unsure of the approach to follow, you could always reach out a financial advisor who will curate investment plans that will be in line with your goals and risk appetite.
Hey, this is Johny Sehgal. I am the owner and caretaker at Finance Jungle. I completed my education in BSC and now heading towards the digital marketing industry. I usually have interests in reading, playing games and watching movies. I also love to write content based on quality information. The main motive of mine is to provide the top and best quality information to my readers. Finance Jungle is the blog for the same.