Trading is both a science and an art. When it comes to options trading, there are a variety of strategies you can use to make money. You need to understand what these strategies are and how to use them to be successful.
As a beginner in options trading, you may have many questions on the same, but you are in the right place. This read will look at the different types of options trading strategies and how you can use these to make money.
What is options trading?
Options trading may seem like jargon to many novices, but it is actually a very simple concept. An option in trading is when the investor has two choices- buying or selling an underlying asset at a set price on or before a certain date. However, they are not obligated to do so. In simpler words, when you purchase an option, you are buying the right to buy or sell a security at a predetermined price in the future. This can be a great way to make money if done correctly.
Types of options trading
There are two main categories of options trading which are puts and calls.
- Call option- A call option refers to the right to buy a security at a specific price within a certain time frame. It is what you would use if you believe that the security will increase in price in the future.
- Put option- A put option refers to the right to sell a security at a specific price within a certain time frame. It will be a good choice if you believe that the security will decrease in price in the future.
Now that you know what options are and the different types of options, it is time to look at some of the most common options trading strategies.
Options trading strategies
There are many different options trading strategies that you can use to make money. However, not all of them will work for everybody. You need to find the best ones that fit your personality and risk profile. Here are some of the most common types of options;
1. Covered call
A covered call is when you own the underlying security and sell a call option on the same security. It is a great way to make money if you believe that the security will stay around the same price. If you are looking for the best way to reduce your risk, this is your strategy.
2. Naked put
A naked put is when an investor has no position in the underlying security and sells a put option. It is a high-risk strategy and should only be used if you are confident that it will be profitable for you.
3. Bull call spread
It is called a bull call spread when you buy calls simultaneously at a strike price and sell the same number of calls at a higher strike price. It is a great way to make money if you think that the security will increase in price, but you do not want to pay the full price for the option. This is a bullish strategy that will limit your risk.
4. Bear put spread
The bear put spread is a vertical spread where you buy and sell put options at a lower strike price. It is a bearish strategy used when you think the security will decrease in price, but you do not want to pay the full price for the option.
5. Long Straddle
A long straddle happens when you purchase a put and call at the same strike price. This is a very risky strategy and should only be used if you are confident that the security will make a big move in price, but you do not know which direction it will go. You should be prepared for both an increase and a price decrease.
6. Short Straddle
This is the opposite of a long straddle where you sell both a put and call at the same strike price. If you think that the security will make a big move in price, but you do not know which direction it will go, this would be a good strategy.
7. Iron condor
An iron condor is when you hold a bear call spread, and bull put spread simultaneously. It is a versatile strategy you can use in many different market conditions. You buy two call options and sell two put options with the same expiration date. It is a low-risk strategy that many investors use to generate income.
Understanding options trading can be overwhelming at first, but it is not as complicated as it seems. There are many different strategies that you can use to make money. You just need to find the ones that work best for you.