Though there are different strategies in options trading, this article focuses on the 5 most popular options trading strategies for beginners and when a trader might use them for their subsequent investment. While these strategies are pretty simple and can earn a trader a lot of profit, they aren’t risk-free.
Options are a derivative contract that offers the holders (buyers of the contracts) the right but not the compulsion to acquire or sell a security at a specific price and a certain point in the future. Instead, an option buyer is expected to pay a premium the sellers charge for such a right.
Should market prices move negatively for option holders, they will allow the options to end valueless and not perform this right, ensuring that prospective losses do not exceed the premium. Contrastingly, if the market changes in a way that makes this right more viable, it uses the right.
Most traders are aware of these basic concepts; hence they often jump into options trading with little knowledge of the options strategies that are available to them. However, several options strategies subside risk and maximize profit, allowing you to enjoy the flexibility and power associated with options trading.
Options strategies can vary from relatively simple to very intricate, considering the various payoffs and sometimes odd names. Regardless of their intricacy, all options strategies are created on the two primary options types: the Call and the Put.
Without any further ado, let’s examine these top 5 options trading strategies for beginners to limit their risk and maximize return!
Top 5 Options Trading Strategies for Beginners
1. Covered Call
The first options trading strategy for beginners on my list is the Covered Call strategy. This options trading strategy entails writing (selling) a call option against the same asset on which you presently own an extended position. Your current position “covers” the options trade, meaning that you can deliver the underlying security if the call option buyer chooses to perform their right to buy them.
This strategy aims to boost the profit you can gain from the extended position alone by getting the premium from selling an options contract. This is a well-known strategy as it generates profit and minimizes some risk of being long on the asset alone.
Covered calls are used by bullish traders on the underlying market, hoping its value will rise over the long term, and during the short time, there will be a slight price change. This is referred to as a ‘‘neutral strategy’’ because it is executed when there is a slight change in the underlying market estimation.
2. Long Call
The long call, also known as buying a call, is one of the options trading strategies for beginners where you purchase a call option or “go long.” This simple strategy predicts that the underlying asset will rise beyond the strike price by expiration.
In this strategy, the trader acquires a call — known as “going long” a call — and anticipates that by expiration, the asset price to be more than the strike price (The trader expects the market to be bullish or rising in the future.). The benefit of this trading strategy is open, and traders can make their initial investment multiple times if the asset increases.
Also, the advantage of this strategy is that the opportunity to make a profit is high, and it minimizes risk; the loss is just the premium paid.
Simply put, buying a call or long call means the buyer has the option to acquire the underlying, meaning that when the underlying increases, the buyer will generate income. However, for traders to use this strategy to maximum unlimited reward, they need to have an uptrend.
3. Buying Puts Or “Long Puts”
Buying puts is similar to buying calls, just that investors expect that the asset value will fall rather than rise. As a result, investors usually use this strategy as a substitute for short-selling as the risk is highly smaller.
Investors risk only the premium price when obtaining puts if the asset increases above the first strike price. Depending on the premium size, purchasing puts can be a low-risk way to benefit from falling prices.
The long-put strategy works similarly to the long-call method, while the long-put strategy is traded when the underlying asset is expected to decrease; the reverse is the case regarding the long call. Here also, the maximum risk would be of the premium paid by you, while the maximum profit is unlimited.
In the long-put option trading strategy, the put option is purchased by the investor, and the market is in a bearish state. The prices are assumed to be declining. The long put is performed when traders guard against price reduction.
In this strategy, the trader acquires a put — known as “going long” a put — and expects that the asset price will fall below the strike price by expiration. The advantage of this trade can be multiples times the first investment if the asset significantly drops.
4. Short Put
The short put strategy is the reverse of the long put, but here the trader sells a put — known as “going short” a put — and assumes the asset price will go beyond the strike price by expiration. The trader gets a cash premium in exchange for selling a put, which is the highest a short put can make. If the asset ends below the strike price at option expiration, the trader must acquire it at the strike price.
The short put is one of the best options trading strategies for beginners and investors selling options. This strategy aims to gain from premiums paid on options contracts. For example, assuming Investor X is using a short put strategy and trades a put option to Investor Z.
If the rate of those assets rises or remains the same, Investor Z may allow the put contract to expire. After the contract ends, Investor X would keep the primary premium, thus earning from the deal.
In this situation, a put option is sold to an open options trader. The purchaser is long on that option, while the selling is short.
5. Married Put
As the name suggests, Married Put means joining two investment strategies: assets and options. These investments will be made alongside, with investors procuring one put option for every 100 portions of the asset they buy. Here a put option holder has the right to sell the asset at the strike price.
A capitalist may decide to use this strategy as a way to guard their downside risk when holding an asset. However, this strategy also works as an insurance policy; it creates a price floor when the asset’s price suddenly declines. This is why it’s also called Protective Put.
In a married put, investors are trying to protect themselves against a loss in security value. When done appropriately, this strategy is applied to balance portfolio losses while waiting for asset prices to rise. In this approach, the investor or trader holds a long position for an asset. Then, there are multiple purchases of the same asset to hedge against the asset prices depreciating.
Final Thoughts on The Best Options Trading Strategies for Beginners
Options are one of many investment automobiles you can use to build a successful fiscal portfolio, but you will need to put some work on your part. While options are generally associated with high risk, investors or traders can use some basic strategies with minimum risk to scale through. Moreover, even risk-averse traders can use options to improve their overall profits.
Options trading strategies for beginners are often exhausting. The most excellent options trading advice for beginners is to do the work ahead of time. Learn about the security market, investigate brokers in your locality, and enquire for insight from your network.
Overall, the options trading strategies for beginners explored in this article are straightforward, risk-adjusted, and can be used after a bit of practice. However, a trader needs to understand the market trend and prospects before using these strategies and, most importantly, leave the legs to control the losses if the market begins to act unfavorably.
I hope this article was helpful. Should you have further questions, do well to leave them in the comment section below.
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