Many new traders jump into trading options without having a proper understanding of effective strategies to trade options. Luckily, there are lots of strategies out there that can be very helpful in limiting the risk factor and increase the profit rate. As a newbie in options trading, you ought to learn how your little effort can help you take advantage of the power and flexibility that come with this type of trading.
Here we have put together some useful strategies for trading options that are not only useful for you to shorten the learning bend but also are effective guide to walk in the right direction.
- Married Put Strategy – This strategy allows you to buy an asset, such as shares of stock, and simultaneously buy put options for an equal number of shares. Holding a put option will give you the right to sell the shares of stock at the strike price while each contract’s value is equivalent to 100 shares. With Married Put strategy, you can protect your downside risk when having a stock as this strategy works like an insurance police and makes a price floor for the stock’s price to fall sharply. The only drawback of married put strategy is that if the stock doesn’t fall, you will lose the premium that you paid for the put option.
- Covered Call – With covered call strategy, you can purchase a naked call option and structure a basic call together. Covered call enables you to make money and reduce the risk of a particular stock being long alone. Here, the trade is done when you are willing to sell your shares of stock at a short strike price. To use covered call strategy, you will buy the underlying stock and simultaneously sell (or write) a call option on the same shares. You can use covered call strategy when you have a short position in the stock and a nonaligned view on its direction. This can also help you gain profit by selling the call premium or protecting the asset against a potential decline in the price value of the underlying stock.
- Protective Collar – You can execute this strategy by buying an out-of-the-money or OTM put option and selling or writing an OTM call option for the latter with the same expiration date simultaneously. Investors mainly use this strategy when they see a long position in a particular stock is gaining substantial profits. This also helps them to have downside protection as well as the trade being obligated to sell shares at the higher price.
- Long Straddle – This strategy is used when you buy a put option and a call option on the same underlying asset at the same strike price and expiration date at the same time. You can always use this strategy when you believe that the value of the underlying asset will considerably move out of a range, but are not sure of which direction it will move to. With long straddle, you get the opportunity to get unlimited gain theoretically and limit the maximum loss to the cost that you paid for the combination of both the options contracts.
Trading strategies are meant to help traders trade options the way they feel is easy for them to gain profits. GigaFX doubles the pleasure of a fruitful trade when you execute a tradeoff through its platform as this not only has a user-friendly interface for traders but also all the tools you will need to make a trade successful.