Most traders, particularly those who are new to trading, dive right into option trading without first learning about the various strategies available to them. Many option trading strategies, when used prudently, can help in both minimizing risk and maximizing returns. Traders can maximize their profits by carefully utilizing the flexibility and power of trading in stock options.
Here are some lesser-known option trading strategies that every trader new to option trading should be aware of.
The Long call:
The long call strategy entails purchasing a call option, also known as “going long.” This simple strategy is a bet that the underlying stock will rise above the strike price by the expiration date.If you don’t mind losing the entire premium, a long call is a great way to bet on a stock rising while earning much more profit than if you owned the stock directly. It can also be used to mitigate the risk of directly owning the stock. Some traders, for example, may use a long call rather than owning a comparable number of shares of stock because it provides them with upside while limiting their downside to only the cost of the call versus the much higher expense of owning the stock.
The Long Put:
The long put is similar to the long call, but you’re betting on a stock’s decline rather than its rise. The investor purchases a put option, betting that the stock will fall below the strike price before the option expires.If you can stomach the potential loss of the entire premium, a long put is a way to bet on a stock’s decline. If the stock falls in share market significantly, traders will make far more money by owning puts than by short-selling the stock. Some traders may use a long put to limit their potential losses, as opposed to short-selling, where the risk is uncapped because a stock’s price could theoretically continue rising indefinitely and a stock has no expiration date.
The Covered Call:
Because there are two parts to the covered call, it becomes more complicated. The investor must first own the underlying stock before selling a call on it. The investor gives away all appreciation above the strike price in exchange for a premium payment. This strategy bets on the stock remaining flat or slightly lower until expiration, allowing the call seller to pocket the premium while keeping the stock.If the stock is trading below the strike price when the call expires, the call seller keeps the stock and can write a new covered call. If the stock rises above the strike price, the investor is required to deliver the shares to the call buyer, who will sell them at the strike price.
The investor sells at most one call for every 100 shares of stock; otherwise, the investor is short “naked” calls, with potentially uncapped losses if the stock rises. Nonetheless, covered calls transform an unappealing options strategy, naked calls, into a safer and potentially more effective one, and they are popular among income investors.
The Short Put:
The short put is the inverse of the long put in that the investor sells a put, or “goes short.” This strategy bets on the stock remaining flat or rising until expiration, with the put expiring worthless and the put seller pocketing the entire premium. The short put, like the long call, can be used to bet on a stock rise today in price, but there are some key differences.A long call bets on a significant increase in the price of a stock, whereas a short put is a more modest bet that pays off more modestly. While a long call can return multiples of the original investment, a short put can only return the premium.
The Married Put:
The married put, like the covered call, is a little more sophisticated than a basic options trade. It “marries” a long put with ownership of the underlying stock. The investor purchases one put for every 100 shares of stock purchased. This strategy enables an investor to hold a stock for potential appreciation while hedging the position if the stock falls. It works in the same way that insurance does, with the owner paying a premium for protection against asset decline.
SEBI-regulated option trading is one of the most exciting areas of the investing world because it has the potential to generate massive profits. However, in order to succeed, a trader must employ option strategies. A trader must understand which strategy is best suited to a given situation, as well as the risks and rewards associated with it. At Tradeplus, we will provide you with the right set of expertise and tools to deal with options trading. We also offer one of the lowest brokerage fee for options trading.