Home General These Are the Key Options Trading Strategies to Know

These Are the Key Options Trading Strategies to Know

by Olufisayo
Options Trading Strategies

You’re getting into the game of trading options and want to learn some basics.

There are options trading strategies all across the board, from very simple approaches to highly complex schemes. Those strategies all have something in common, however: they’re based on calls and puts.

In this article, we’ll see how to trade options with some key strategies to know. Read on!

The Long Call

How does options trading work? It doesn’t have to be overly convoluted. The long call is a straightforward strategy where you “go long”, or buy a call option.

It is based on the belief that the underlying stock will exceed the strike price by expiration. One of the benefits of the long call is that it saves you the risk of directly owning the stock.

       

If the call is well-timed, a long call could prove highly profitable as long as the stock rises. Alternatively, even if the stock goes down, it is still possible to sell the call before expiration and salvage something.

The Covered Call

The covered call is very appreciated by investors who want to generate income while limiting risk if they expect a stock to stay flat or slightly go down.

It has two parts: first, you must own the underlying stock; second, you sell a call on the stock. The investor forgoes all appreciation above the strike price in exchange for a premium payment.

It allows investors to receive a better sell price for a stock, selling calls at a higher strike price.

The Long Put

The long put follows a similar principle to the long call, except with the belief that a stock will go down rather than rise. The investor purchases a put option, wagering that the stock will decline below the strike price by expiration.

       

If the stock goes down significantly, traders make much more by owning puts rather than short-selling the stock.

The Short Put

As you can guess, the short put is the opposite of the long put. The investor “goes short”, or sells a put. With this strategy, the investor wagers that the stock will remain flat or rise until the expiration.

Investors typically use short puts to create income by selling the premium to other investors who wager that a stock will go down. Put sellers don’t want to have to pay out, so they sell the premium.

However, it’s not advised to sell puts in excess. Indeed, if the stock declines below the strike at expiration, the investor is on the hook to buy shares. The premiums received from selling puts could quickly be eaten up by a falling stock.

The Married Put

The married put is called that way because the investor “marries” a long put with owning the underlying stock.

       

For every hundred shares of stock, the investor purchases one put. It’s a way for investors to continue owning a stock while hedging the position in case the stock falls.

Options Trading Explained

As a budding investor, knowing which options trading strategy to employ is challenging with all the nuances involved. Trading options profitably requires some experience.

Financial advisors such as Options Trading EDU are there to help you learn how to turn a profit while avoiding classic beginner mistakes.

Key Options Trading Strategies

Options trading is often considered high risk, however, these options trading strategies help risk-averse traders get into options trading to enhance their returns while not pulling their hair out.

However, it’s important to understand that there’s always a potential downside to any investment and be aware of what you could lose.

       

Learn more on financial management in our Money & Finance section.

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