Top 5 Options Trading Strategies for Beginners

 

Options trade in the Indian scenario is huge and could be complex. Options are very popular among investors as their prices move fast. Financial profits are rewards one earns after careful trading. The best way to focus on earnings is through effective strategies. Strategies can be altered, re-defined, and have inventive ways to operate. Option tactics can be divided into two broad categories called “call” and “put.” 

 

The top five options trading strategies are straightforward. They have a certain amount of risk and have the ability to channel gains. They are long call, covered call, long put, short put, and married put. The strategies are explained below. 

Different Types of Strategies in Options Trading

 

Apart from the common five strategies, traders follow many other tactics in options trading. Every trader would look to limit losses and maximize gains. As a trader, one should know that the call option would give the right to buy without an obligation. A put option gives the right to sell with no obligation. These trading strategies may be bearish or bullish, or neutral. There are many different types of option trading tactics. They are:

• Bull Call Spread

• Bull Put Spread

• Call Ratio Back Spread

• Synthetic Call

• Bear Call Spread

• Bear Put Spread

• Strip

• Synthetic Put

• Long and Short Straddles

• Long and Short Strangles

• Long and Short Butterfly

• Long and Short Iron Condor

• Long Call

• Long Put

• Short Call

• Short Put

• Covered Call

• Long calendar spread with calls

• Long calendar spread with puts

• Diagonal Spread with Calls

• Diagonal Spread with Puts

• Christmas Tree Spread with calls

• Christmas Tree Spread with puts

• Butterfly Spread calls

• Butterfly Spread puts

• Iron Butterfly

• Collar

• Protective put

• Synthetic long stock

• Risk reversal

It is observed that bullish trends are often preferred. There are so many methods and routes to trade options. It is vital to know the common five strategies and the timing to implement various strategies. This will help in gaining huge profits. 

Long call:

A Long Call Options trading strategy is a basic strategy. The trader expects the market to be bullish or rising in the future. The benefit of this strategy is that it limits risk; the loss is limited to the premium paid. The opportunity for gain is high. Here the trader takes a single position to buy a call option. It could be ATM, OTM, or ITM. Going long on call gain is earned by later selling the call option that was bought. This is done when the prices are rising.

Here the trader pays the premium for the right. In case the market is not moving beneficially, the loss is restricted to the premium.  

Covered call

A covered call involves two parts owning calls and selling them on a share-to-share basis. “Buy-Write” is the term used to denote the action of buying and selling assets at the same time. In “Overwrite,” the selling happens for stocks that were purchased before. 

Long put

Here the put option is bought by the investor. The market would be in a bearish position. The prices are assumed to be falling. The long put is exercised when traders hedge on prices falling. 

Short put

In this scenario, a put option is sold to open options trade. The buyer is long on that option, and the selling is short. This is called the short put option strategy. 

Married put

In this strategy, the trader or investor holds a long position for an asset. There are more purchases of the same asset to protect against depreciating prices of the asset.

Conclusion

Every trader would like to improve their actions for more profits. It is often observed that selling out-of-the-money put and call options has been successful. The opportunity and chance to gain are higher. Credit can be used to diversify risk. Though not guaranteed, one can yield a gain of 40% annually if everything is done right. The safest strategy is to cover calls. Here the risks are reduced. Happy Investing!!! 

Options Trading Strategies FAQs: Key Questions Answered

1. What are options trading strategies?

Options trading strategies are structured approaches that use one or more call or put options based on a trader's market view, risk tolerance and trading objective.

2. What are the best options trading strategies for beginners?

Common strategies beginners may study include long calls, long puts, covered calls, protective puts and bull call spreads. Each has different risk and reward characteristics.

3. What is a call option?

A call option gives the buyer the right, but not the obligation, to buy an underlying asset at a specified strike price according to the contract terms.

4. What is a put option?

A put option gives the buyer the right, but not the obligation, to sell an underlying asset at a specified strike price according to the contract terms.

5. Is options trading risky for beginners?

Yes. Options involve market risk, and factors such as volatility, time decay, leverage and price movements can result in losses. Beginners should understand the risks before trading.

6. Can options trading guarantee profits?

No. No options strategy can guarantee profits. Market conditions can change, and traders can lose some or all of their invested capital depending on the strategy.

7. What is a covered call strategy?

A covered call generally involves holding an underlying asset while selling a call option against it. The premium received may provide potential income, but the strategy can limit upside potential.