Since modern times have seen advancements in almost everything, trading and investments have also seen the light of financial evolution, coming up with options. An option is a contract that gives the buyer rights, but not the obligation, to buy or sell the underlying asset of the contract when the time calls before the expiry date. You can do trading in options to earn profits by speculation and hedge risks. Sounds interesting? Let’s know more.
Options trading: A beginner’s guide
As a new trader, trading in options might feel a bit too complicated than it sounds. An advanced trader better manages this, but you need not worry. For the starter, options trading is trading contracts, not assets directly. So, the following things need to be taken care of:
- Options trading gives you rights, not the duty or obligation to buy or sell the asset associated with the contract.
- Options are mostly of two types. One of them is the call option that provides you with a right to buy—by paying the strike price—an underlying asset before or on your contract’s date of expiry.
- The other type is a put option where you gain the right to sell off the underlying asset at the strike price, before or on your contract terms’ date of expiry.
Important options trading strategies
There are various options trading strategies that you can adopt and make your options trading experience a delightful one. We have listed some of the most important strategies below, which can help you appreciate the value of your portfolio while trading in options.
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Bull market strategy
When you predict a rise in the underlying stock’s market price, you can use a bull market strategy. You can opt for buying call options during a bullish market, making your profit chances manifold. A short term put when the price goes up is a good way. Buying call options with low strike prices and selling those with higher prices is another strategy.
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Bear market strategy
When you predict a fall in the underlying stock’s market price, you can use a bear market strategy. A bear market strategy is quite similar to the above-given strategies; you can buy put options with higher strike prices and sell options with low strikes. Sell away call options that might see a decrease in price in the future. Selling and buying put options having the same associated assets is called the covered put strategy.
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Neutral strategy
Also known as the non-directional strategy, this should be used when you are unsure about the market price flow. There can be several combinations of bearish and bullish strategies which can be used as neutral strategies. The butterfly strategy combines buying call and put options with higher strikes and selling the ones with lower strikes. Another strategy is the collar, where you buy the asset stock along with low-strike put options and high-strike call options.
Conclusion
Risk handling while trading in options can be very tricky and complicated for new investors. Therefore, letting the experts handle it would be a better idea. As a beginner, the strategies might seem confusing, but choosing the appropriate Options Trading App can make your decision-making easy and risk-free.
