Options Trading Strategies: A Beginner’s Guide

An option is a derivative contract according to the conditions that allow the buyer to contract. The option buyer will be charged a certain amount, which is called “Premium” by the seller for such privileges. If the market price is not favorable for option holders, they will let the options expire. Therefore, it is confident that the loss will not be higher than the premium. On the other hand, the option seller is considered riskier than the option buyer, which is why they want this premium.

The buyer of the purchase contract for the purchase of future reference assets at a specified price called the exercise price by choosing the buyer to get the right to sell future reference assets at a specified price.

Why is the trade option rather than a direct asset?

There are some advantages to the trading option. Chicago Board of Options Exchange (CBOE) is the largest exchange in the world by offering alternatives for single stocks, ETF, and various indexes. Traders can create optional strategies from buying or selling a single option to very complex orders.

Here are the basic choice strategies for beginners.

Call purchase (Long Call)

This is the desired strategy for traders:

• Have “confidence” or have confidence in ETF or index specifically and requires risk limit
• Want to take advantage of taking advantage of higher prices

An option is a tool that allows traders to expand the benefits by risking less than necessary if trading reference assets. Contract standard options about controlling 100 stocks of basic security.

Suppose traders want to invest $ 5,000 in Apple (AAPL). Trading is about $ 165 per share. With this number he or she can buy 30 shares for $ 4,950, assuming that the price of the stock increases 10% to $ 181.50 in the next month if he is not interested in commission or any transaction. The trader’s portfolio will increase to $ 5,445, allowing traders to have a net return of $ 495 or 10% from the investment.

Now, suppose the call options in stocks with the exercise price equal to $ 165, which will expire about a month from now will be for $ 5.50 per share or $ 550 per contract with the investment budget of the trader. He or she can buy a nine optional option for a price of $ 4,950 due to the 100-share-controlled option contract. The trader has agreed effectively with 900 shares. If the stock price increased by 10% to $ 181.50, when the expiration option will expire in the money and worth $ 16.50 per share ($ 181.50 – $ 165 protest) or $ 14,850 per 900 shares. That is the net dollar returns at $ 9,990 or 200% of the investment, which is more compared to asset trading.

Risk / Return: The loss that may arise from the trader from the remote call is limited to the premium. Unlimited potential profits because the payment options will increase along with the reference asset price until the expiration date. 

Covering calls

This is the desired position for the trader:

• Expected to change or slightly increased in a reference price
• Willing to limit the exchange potential for disadvantage protection

Comprehensive calling strategy involves buying 100 shares of reference assets and selling call options compared to those shares. When traders sell calls, he or she will collect the premium of options which will be reduced. Basic costs of shares and provide disadvantages. On the other hand, by selling trading options, agree to sell the basic stocks at the exercise price of options. 

Suppose the trader purchased 1,000 BP (BP) shares at $ 44 per share and wrote 10 call options (one contract for every 100 shares) with a $ 46 strike price that will expire in one month at a price of 0.25 million per share. Or $ 25 per contract and $ 250 total for 10 contracts $ 0.25 premium, reducing the basic cost of the stock is $ 43.75. Therefore, the reduction of reference to this point will be cleared by the premium received from optional position therefore propose restrictions.

If the share price is higher than $ 46 before the expiration Short call options will be used (or “called” out), which means that the trader must deliver the shares at the exercise price of the options. In this case, the trader will make a profit of $ 2.25 per share (the exercise price of $ 46 – cost criteria $ 43.75).

However, this example shows that traders do not expect that BP will move above $ 46 or less than $ 44 in the next month, as long as the stock does not rise above $ 46 and is called out before the option will expire. Traders will collect free and clear premiums and can sell calls per share if he or she chooses.

Risks / Returns: If the stock price is higher than the right price before the right to use the right to purchase the short and the trader must deliver the reference stock at the right price of the option, even if the price will be Below the market price In exchange with this risk, the comprehensive calling strategy will provide protection in the premium format that has been received when selling call options.

Protective set

The protective cloth is long, such as the strategy that we mentioned above. However, the goal according to the name means is to prevent the disadvantages compared to the efforts to get profit from moving disadvantages. If the trader is the owner of the stock that he or she is bullish in the long term but wants to prevent the reduction in the short term, they may buy a protective set.

If the price of the basis is increasing and higher than the price used to protest when the option is expired Will expire worthless And the trader will lose a premium But still benefit from the increasing reference price. On the other hand, if the reference price decreases, the position of the portfolio of the trader will lose value. But this loss is covered by profit from the majority of trading options. Therefore, the position can be imagined effectively as an insurance strategy.

Traders can set the right price lower than the current price to reduce premium payments by reducing the cost of preventing disadvantages. This is considered deductible insurance. For example, suppose that investors buy Coca-Cola (KO) shares 1,000 shares for $ 44 and want to protect the investment from the movement of unwanted prices in the next two months. The following moving options are available:

The table shows increased protection costs according to the level of protection. For example, if a trader wants to protect the investment from the price that is reduced, he or she can buy an option that puts 10 money at a price that hits at $ 44 for $ 1.23 per share or $ 123 per contract for the cost. All of $ 1,230, but if the entrepreneur is willing to withstand some levels of risk, he or she can choose less cost out of money, options such as $ 40, put in this case, the price of the option is low. 

Risk / Reward: If the price of the reference product is still the same or increased, the loss may occur. It is limited to the premium option which is paid as a guarantee. However, if the price of the basis is reduced, the loss of funds will be compensated by the increase in the price of the option and is limited to the difference between the initial stock price and the exercise price plus the premium paid to the body. select In the above example, the exercised price is $ 40. The loss is limited to $ 4.20 per share ($ 44 – $ 40 + $ 0.20).

Other options strategy

These strategies may be more complicated than buying or calling a little. But is designed to help you manage the risk of options better:

• Comprehensive calling strategy or buying strategy – Buy shares and investors selling call options in the same stock. The number of shares you buy should be equal to the amount of the calling options you sell.
• Paid strategy: After buying an investor, buy the option for the equivalent number. The wedding is effective like an insurance policy with a short-term calling option with a strike price. At the same time, you will sell the number of call options at a higher price.
• Collar protection strategy: Investors buy the option, take money while at the same time, write a call option outside the money box for the same stock.
• Long Straddle Strategy: Investors buy call options and placing options at the same time. Both options should have the same exercise price and expiry date.
• Long Strangle Strategy: Investors buy part-time calling options and placing options at the same time. They have the same expiration date. But they have the exercise price. The strike price should be lower than the price.

Bottom line

Options offer alternative strategies for investors in profiting from reference securities trading. There are a variety of strategies related to the combination of reference asset options and other derivatives. Basic strategies for beginners include buying, calling, buying, selling, comprehensive calls and buying protection lines. There are more advantages in trading options than reference assets such as downside protection and leveraged refunds, but there are disadvantages such as specific payment requirements in advance. The first step of the trading option is to select brokers. Fortunately, Investopedia has created the best online brokers list for optional trading, so that the start is easier to use.