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Simple Options Trading Strategies for Beginners

Simple Options Trading Strategies for Beginners

One of the best aspects of becoming a trader is the sheer amount of different opportunities out there that can allow you to be profitable. The most successful traders are constantly learning new things and seeking out different ways to make money in the market. If you aren’t familiar with trading options, it’s a great time to start learning. Options can help you leverage your trades, generate income, and hedge against risk.

Options trading strategies range from extremely complex to fairly simple. It is vital to familiarize yourself with the risks of trading options before you get started trading them. If you aren’t familiar with options trading or just want to learn a little bit about the topic, this article is for you. Let’s take a look at some simple options trading strategies for beginners.

What is an option?

Before we get into strategy, it’s a good idea to review what exactly an option is. The simplest explanation of a stock option is that it is a contract between two parties where the purchaser obtains either the right to buy or the right to sell 100 shares of an underlying stock at a certain predetermined price.

Each option contract is tied to 100 shares of a stock, which means you can leverage price fluctuations without actually purchasing 100 shares. That is the real power of options trading. Also, keep in mind that options are contracts that feature an expiration date. That means that time is a crucial factor to consider in options trading strategies. Every options contract has an expiration date and a strike price. The expiration date is the date at which the option to either buy or sell an underlying stock at the strike price expires. It pays off to learn a little bit about options pricing and the Greeks before you dive headfirst into the world of options trading.

Long Call Strategy

Keeping things simple with options is a good place to start, which is why going long with a call option is featured in this article. With this strategy, you are purchasing a call option with the idea that the stock will increase in price prior to the expiration of the option. The upside with this strategy is theoretically unlimited, while the maximum downside is the premium you paid for each option contract. This is a bullish strategy that can be very profitable if you do your research ahead of time and choose the correct strike price.

Long Put Strategy

Another simple options trading strategy to consider is purchasing a put contract. The main difference between a long call and a long put is that you are expecting the price of the underlying security to go down instead of up. Keep in mind that your maximum loss is the premium you pay by entering into a long put trade. If you are alright with accepting that risk, long puts can be extremely profitable.

Covered Calls

Perhaps the best options trading strategy to get started with is writing covered calls. This strategy might seem a bit more complex upon first learning about it, but it is actually quite straightforward. First, you must own the underlying stock that you are planning to write a covered call on. That means you will need 100 shares of an underlying stock before writing a covered call. By selling (writing) a call, you are providing someone else with the right to buy your stock at a certain price at any time before the expiration date. It is considered a “covered” call because you already possess the shares in the event that the contract gets exercised.

With this strategy, you are hoping that the stock will either stay flat or slightly decrease in value until the expiration date of the options contract. If that is indeed the case, you will get to keep the premium from selling the options as well as your 100 shares. Remember that if the stock price is above the strike price of the call option at expiration, you will have to sell your 100 shares at the strike price. Many investors use covered calls as a way to generate income on stocks they think will stay flat in the near future. It’s a simple way to generate some nice income with limited downside risk.

Options trading provides investors and traders with even more opportunities to generate profits in the market. However, the added complexities like time decay, implied volatility, and open interest can prove to be challenging for beginners to grasp. Always make sure you are aware of the risks with any investing and trading strategies you decide to pursue.

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