Options are the most preferred vehicle for traders. They can move quickly and allow you to make (or lose) money quickly. Options trading service strategies can vary from simple to complex and have many payoffs. Sometimes they even have odd names.
No matter their complexity, all options strategies are based on two basic types: the call or the put. Below are five well-known strategies. Here is a breakdown of their risk and reward as well as when traders could use them to increase their chances of making a profit. These strategies are easy to use but can bring in a lot of traders. They are not risk-free. Before we get started, let’s take a look at the basics of calls and puts.
1. Long-Distance Call
This strategy is where the trader buys calls (also called “going long” a calling) and expects the stock to rise above the strike price by expiration. If the stock rockets, traders may earn many times the initial investment.
2. Covered Call
A covered call means selling a call option (“going long”) with a twist. A covered call is when a trader sells an option but also buys 100 shares of the stock underlying it. In this case, the trader sells a call but also buys the stock underlying the option. This makes the trade less risky and can generate income. Traders assume that the stock will trade below the strike price at expiration. If the stock closes above the strike amount, the owner will have to sell it at the strike cost to the buyer.
3. Long Put
The strategy involves buying a put, also known as “going lengthy” a put. The trader expects the stock to drop below the strike by expiration. If the stock drops significantly, this trade can yield many times the original investment.
4. The Short Put
This strategy is the reverse of the long option. However, the trader sells a call — “going short” a call — and expects the stock price to exceed the strike price by expiration. In return for selling a put, the trader will receive a cash bonus, which is the maximum that a short position can earn. If the stock closes lower than the strike prices at option expiration, then the trader must immediately buy it at the strike value.
5. Married Put
This strategy works in the same way as the long put but has a twist. The trader also owns the underlying stocks and buys a put. This is called hedged trading, which means that the trader expects the stock to rise, but will need “insurance” in case it falls. If the stock does drop, the long option will compensate.
How Much Do You Need For Trading Options?
It doesn’t usually take much money to start trading options. As you can see, it is possible to buy a low-cost option and make a lot of money. But, it’s easy for you to lose your cash while “swinging at the fences.”
A few hundred dollars is all you need to start trading options. If you make a mistake, your entire investment could be lost in a matter of weeks or months. To be more secure, you can become a long-term invest-and-hold investor and increase your wealth over time.
Bottom Line
Trading options come with high risks. However, traders may be able to turn to basic strategies that carry low risk. Options are available to help traders who are not afraid of risk. But it is important to know the downsides of any investment. You will be able to assess whether the potential gains are worth it.
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