Options trading strategies you should know about

If you do not have any trading background, you may not have come across options trading or may not fully understand its intricacies. But options are one of the most exciting and challenging areas of the trading world and have a huge potential for substantial financial gains and profits.

However, if you are new to trading, options trading might seem very difficult and you may want simpler strategies that can help you ease into this trading domain. If you want to know more about different trading strategies, this blog can be a friendly guide. It lists the most important strategies involved in options trading.

What are the important strategies in options trading?

Most options trading strategies are based on two fundamental options—calls and puts. You can also create your own strategies by combining some of the basic options strategies. Here are the basic strategies you can encounter in options trading.

  • The long put: The long put is an options trading strategy that focuses on buying stock that is expected to decline in value, to earn a large upside. You can earn a significant return on your investment by short selling the stock in select cases. The long put can also limit your loss to just the premium amount. This strategy can be beneficial if the stock price declines below the strike price before the option expires.
  • The long call: The long call strategy requires you to buy a call option when it is expected to be above the strike price before the expiration of the option. It is similar to the long put strategy but provides returns only if the stock prices rise. The long call can help you earn a higher return percentage as compared to owning the stock directly. The risk of the strategy involves the loss of the premium amount paid for the call if the stock prices drop.
  • The short put: According to the short put strategy, you can sell a put if you expect the stock price to be higher than the strike price by the time the option reaches expiration. This scheme is similar to insurance sales against the stock falling below their strike prices. On the downside, if the stock prices fall below the strike prices, you can stand to lose your premium amount for the option.
  • The covered call: The covered call strategy requires you to sell call options for every 100 shares of the underlying stock you own. You can only do this if you are confident that the stock prices will not fluctuate till the option expires. It can also be used as an exit strategy if you are selling your call for a strike price you are willing to receive. However, you cannot earn extra income on the call other than the premium you paid.

Apart from these strategies, you can use others such as the ‘married put,’ the ‘long straddle,’ and the ‘long strangle’ to earn significant amounts during options trading. These schemes can seem very complex and difficult to understand—you can pursue an options trading course which can simplify them as well as provide an expanded understanding of all the intricacies involved in options trading. Join such a course today to kick-start your trading career.

Claire James
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