Options trading offers traders the chance to profit from market movements without needing to own the underlying assets. However, it is intimidating most of the time, especially for option trading for beginners. That’s why strategies come in handy. Options trading offers opportunities for traders to profit from their expectations about the future prices of stock.
This article will provide an exploration of five best option trading strategies that are particularly suitable for beginners.
Five Best Options Trading Strategies for Beginners
When starting options trading, it is necessary to begin with strategies that are relatively simple and have limited risk exposure. The following are five commonly used options trading strategies for beginners:
1. Covered Call
The Covered Call strategy is when you own an underlying stock and sell call options on it. You earn premium income from selling calls, which helps you avoid loss from a decrease in the price of stock.
In case the underlying stock price does not surpass the strike price, the call option becomes worthless and you retain the premium.
If the underlying stock price rises above a strike price, you may have to sell your shares at a strike price but you still win from receiving a premium thus providing a limited-risk income-generating technique.
2. Cash-Secured Put Strategy
With this strategy, you sell put options on an underlying stock you wouldn’t mind owning at a lower price. You need enough cash in your account to cover the potential purchase if the option is exercised.
If the underlying stock remains above the strike price, you keep the premium as a profit without buying the stock.
This strategy allows you to generate income while potentially acquiring the stock at a discount, making it suitable for investors with a bullish outlook on the underlying asset.
3. Long Call or Put
This is a basic options strategy where you buy call options if you anticipate the underlying stock price to rise or put options if you expect it to fall.
This strategy offers leverage and limited risk compared to owning the underlying stock. Profits increase as the stock price moves in the anticipated direction, while losses are limited to the premium paid for the option.
It’s crucial to conduct a thorough market analysis and understand the underlying factors influencing stock price movements before implementing this strategy.
4. Vertical Spreads
Vertical spreads involve buying and selling options of the same type (both calls or both puts) with different strike prices.
A bullish vertical spread (call spread) involves buying a lower strike call and selling a higher strike call, limiting both potential profit and loss compared to buying a single call option. Conversely, a bearish vertical spread (put spread) involves buying a higher strike put and selling a lower strike put.
This strategy allows for controlled risk exposure and defined profit potential, making it suitable for beginners.
5. Collar Strategy
This strategy combines protective puts and covered calls on owned stock. Protective puts guard against downside risk by giving the right to sell the stock at a predetermined price. Meanwhile, covered calls generate income by selling call options against the stock.
This strategy limits potential losses while still allowing for some upside potential, making it conservative.
It’s suitable for safeguarding gains in a stock position, providing a balance between protection and income generation in volatile markets.
Conclusion
You’ve just discovered five important options trading strategies for beginners. Learning these strategies helps you understand how to handle the stock market and make smart choices. Keep practicing and being patient as you keep learning. If you want to learn more about starting in the stock market, check out courses on stock market basics for beginners on Upsurge.club.
