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Just like with everything else in life, trading options can seem intimidating when you are first starting. However, the concept behind learning options trading is to understand a few fundamental points, and everything else will fall into place.
There are several asset classes when it comes to trading. These include currencies, stocks, mutual funds, ETFs, bonds, etc. Similarly, options are an asset that has an advantage over other assets such as ETFs and stocks.
To help us understand options strategy, we’ve got Ezekiel Chew. He is a world-class trader who has trained retail traders and large financial institutions in Asia and around the world. He is also the developer of the Asia Forex Mentor One Core Program.
In this review, we will find out what is options trading and then look at a few proven options trading strategies. So if you are ready, let’s dive straight in.
5 Basic Options Trading Strategies for Beginners
Many people are lured by the prospect of making good money with options trading yet they lack any background or experience in options trading. Needless to say, they end up losing a lot of money.
The great thing is that there are strategies that one can learn that can help not just in mitigating risk but also help in achieving maximum profit as well. Through practicing on a demo account, one can turn themselves into a successful options trader.
let’s look at some proven options trading strategies which you can use regardless of where you live in the world.
#1. Covered Call
When it comes to options calls, all the call buyer will be doing is buying a naked call option. This is where you can sell options without being the owner of the underlying stock or asset. The goal here is to be able to collect a premium from the call option while hoping that it will ultimately expire without any value to the buyer i.e expire worthlessly.
When this happens then you will not have to pay anything to the buyer. On the other hand, when the price of the asset goes up then you will have to sell the asset at prices below the market price. If that is the buyer has decided to utilize their right of buying the asset.
You will therefore get a maximum profit as the premium received from the buyer. there is a major downside here in that prices can go up continuously.
Another option that you might have is to buy covered calls. These are also known as buy-write. This means that you can buy and write(sell)simultaneously on the call option. The goal is to be able to get a premium received from both trades.
Looking at it this way, if the assets price goes down you would be able to limit your loss with your call option premium. On the other hand, if prices continue to rise you would be able to limit your losses with the writer option premium. You are thus able to minimize loss.
That said a covered call is useful whenever your stock market position is short-term while the future position is neutral simply put you are not expecting the market to behave erratically or have high volatility.
The strategy will therefore work perfectly when you are expecting minor increases or decreases in prices. You are therefore able to generate income through selling the call.
#2. Married Put
This strategy lets you buy an asset-like stock while simultaneously buying put options at a value that is equivalent to the shares. This allows you limited risk in case of a stock price decline that said, it is important to note that you could end up losing a certain amount of money even in the worse situation.
That said, in case of a rise in the price of the asset bought ten you can make a potential profit. On the flip side, the put options often come with a high premium. This will eat away at your profit potential. However, you can put a price flow in case prices go down thus protecting your position.
This is what is considered a bullish strategy that allows traders to insure themselves especially when they are not sure about the price action in the near term. There is a benefit to buying stock and putting an option over it.
Some of these benefits include receiving dividends and having the right to vote. Plus there is the benefit of the stock market price going up infinitely. That said, in case the prices drop, you are cushioned by the put options.
When the put stock is purchased, and the asset is traded at the same strike price, the only loss would be the price that your paid option price.
#3. Bull Call Spread
This options strategy is very effective whenever you want to take advantage of a limited increase in the price of the asset. The goal here is to make use of two call options that allow you to set a price range on the upper and the lower strike price.
You pick the asset which you speculate to increase in price you will then buy a call option of the higher strike price that is above the current price in the market while at the same time setting an expiration date and then paying the premium.
You will then sell the call option at a much higher strike price and the same expiration date while at the same time allowing you to take the premium.
The goal here is to then make use of the premium payment that you received from your call option and use it to cover the price which you paid for the call option. What you are essentially doing is mitigating the risk in case things don’t go according to plan. the downside is that your profits will also be limited.
#4. Bear Put Spread
During times here you anticipate prices to drop significantly soon the bear put spread is a good options strategy to utilize. Here you will be buying a certain number of put options and then proceed to sell the put options at a much lower strike price while maintaining the expiration date.
Just like in the bull call spread strategy, the benefit of the bear-out spread strategy is that it allows you to mitigate the loss as selling the put option will allow you to cover the price of the put option and also get something on top. The disadvantage is that gains will also be limited.
If you speculate that the underlying stock or asset of the options will decrease its value in the foreseeable future, then you will be better off with the bear put call strategy. Keep in mind that you will be giving up on any additional potential profit in case the stock price drops too far.
#5. Long Straddle
If you are anticipating that the price movement will be volatile and highly explosive then you may just want to utilize the long straddle. Traders will make use of this strategy mostly during times of news when laws are being passed or when there is an earnings release.
Traders operate with the idea that the market is anxious which means that they will be uncertain and the volume of trades will reduce. When the event that was being anticipated happens then there is usually a breakout caused by traders who were anticipating entering into the market thus causing volatility.
As a trader, and you don’t have any idea whether you are dealing with a bull market or a bearish market the go-to strategy is the long straddle. This requires you to simply start by buying a long call and then long put in the asset with a similar strike price as well as the expiration date. It doesn’t matter whether the market is bearish or bullish at this point as you will be able to gain a profit.
Furthermore, how much you gain interim if profits or losses will be dependent on the size of the price movement. This causes risk in itself. If the markets don’t react strongly. The traders would not be in a position to know this until the occurrence of the event.
Traders on the other hand could raise the prices as they anticipate tan volatility in the market. This, therefore, means that buying the options would require you to spend a decent amount of money. If however, the price movement isn’t strong you may find that your options expire without any value ie is worthless.
How Options work
If you want to determine the value of an options asset you will need to try and figure out the likely or probably value that it will have in the future. The higher the chance of an event occurring, the more likely that the value of the option is going is rise.
For instance, if traders believe that the value of a certain stock price is going to rise, then the call value of the stock will go up.
Among the reasons why trading in options can be risky is because the option value can expire. the closer the option gets to its expiration time, the lower its value.
This happens because the likelihood of prices moving in the underlying asset is decreasing. this is why options are considered by many traders as a wasting asset.
If for instance, you choose to buy an option for a month, with every day the value of the option will decrease. Time is therefore a major factor affecting the prices and value of the option. For example, a three-month option will be valued more than a one-month option.
The opposite is also true, the three-month option will be set to lose more when it reaches its expiry date than the price one-month option.
Volatility also affects options. The chances of something occurring are greatly enhanced by uncertainty in the market. Once the market is volatile, there is a high chance of large swings in prices.
This increases the chances of something happening and as a result, there is a high chance of the options prices increasing.
Best Forex Trading Course
If you are looking for a way to create wealth, learn a new skill, or diversify your portfolio; then one core program is for you. What is one core program? It is a forex/CFD trading course specially packaged by Ezekiel Chew and available from the Asia forex mentor website. It is the best forex trading course available today. It is comprehensive and requires no prior trading knowledge.
Who is Ezekiel Chew? He is a renowned forex trader and facilitator who have trained several bank traders, forex managers, and successful traders. He has been trading forex and other financial markets for the last 20 years. He has become a multimillionaire and has also made other people millionaires from his training.
What is the content of the program? The program comprises over 50 video lessons where the course is taught in simple clear language. The strategies taught in the program are based on mathematical probability which produces efficient results. His students are already making millions from trades using the strategies learned from the program. You too can join and become a millionaire.
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Conclusion: Why Trade Options
There are many benefits of trading options. Firstly, you are able to hedge the risk. Options trading offers traders with risk managing strategies
Options also offer speculators low-cost methods to enter the market while keeping the risk of downside low.
Furthermore, with options traders also have access to sophisticated trading strategies that allow them to be profitable regardless of the market condition.
Options Trading Strategies FAQs
What is the best strategy for option trading?
One of the simplest and most effective trading strategies for options trading is the call spread which is often employed when the trader is very bullish.
The strategy allows traders to make a profit when the market goes up and make a loss when the market or limited profit when the prices drop.
What are the four basic options strategies?
The four main options trading strategies include the covered call,m the married put the call spread, and the long straddle.
The major benefit of the options trading strategies is that they help traders get maximum profit while minimizing their losses.