What are the benefits and actual strategies for trading options?
  • Jonathan Rowe
  • 18.10.2023
From this article, you will learn:
What are the benefits of options trading;
The top strategies for trading options;
Options trading insights that almost no one knows.
 

Options trading is known for both its complexity and versatility in terms of the ability to employ trading strategies. Option trading also allows you to apply effective risk management techniques. The sale or purchase of the right to speculate on the underlying asset at a set price within a set period of time. Options are widely considered to have one of the highest profit potentials, with fewer risks than other instruments with similar profit potential.

What is a covered call strategy

In general, the covered call strategy (hereinafter abbreviated as C/C) is a conservative strategy. In this strategy, a trader takes a long position in the underlying instrument and sells a call option on the same instrument. What is the purpose of these actions? The goal is to profit from the sale of the o/c. The essence of the strategy is that we don't need to call options because the asset will rise in value, and we don't want to buy it at an inflated price, instead we want to sell it at a higher price.

Key benefits of a covered call strategy

The benefits of covered call strategy are:

  • Generation of additional income;
  • Protection against small losses;
  • Improving portfolio returns.

Why a p/c strategy may not work

Selling call options can often limit an investor's potential profits. If the stock price rises sharply, investors must still sell the stock on call options to pay the price, providing the opportunity for more price appreciation. This can be especially problematic during periods of rapid stock growth.

Put option strategy

The put strategy is a strategy that is often used as a way to insure an investor. When investing when there is a long position in an instrument, the purchase of a put option is made to protect against a strong decline in the price of the instrument. The put option is favourable because if the value of the instrument declines, the put option increases its value relative to the underlying instrument, thereby offsetting the losses.

The most common mistake when using put options

Unfortunately, very often, traders think that they can get almost instant results using put options. In fact, this type of option has a limited expiration period, and it is also worth considering that the stock price can change slowly. If the price falls slowly, or does not change at all, the put option may go bust.

Long Straddle Strategy

This technique involves the simultaneous purchase of both a call and a put option on the same underlying instrument with the same strike price and expiry date. The goal of this plan is very simple: to profit from a significant price movement, regardless of the direction.

It is important to know that although this strategy is very attractive as it allows you to profit regardless of the trend direction, it can be realised most successfully only when there is sufficient volatility. This does not mean that you will not be able to make money when the volatility of the underlying instrument price is low, but it is best when the volatility is high, for example, in the run-up to important events, most often quarterly results.

Credit spread strategy

This strategy consists of putting the first option on the market and buying a second option on the same asset with different strike prices and expiry dates. It is used to obtain a net credit, which is the maximum profit. The goal is for both options to expire at zero.

Important tip: Think about how you will manage your risk. Setting stop limits can help protect you from big losses. Determine in advance at what price level you will close your position. This will allow you to avoid the mistake made by at least 50% of beginners who use this strategy for the first time.

Bottom line

Options are one of the most popular instruments for a reason. They allow you to hedge your risks and profit from market volatility. That being said, you need to know that options trading does not forgive poor knowledge of this instrument. It is necessary to have a good command of all strategies and constantly supplement your knowledge with new theoretical and practical knowledge. If you use options wisely, they can become a powerful tool in your arsenal that can allow you to achieve your trading goals.

Link to part two https://1plus-smart.com/reviews/working-strategies-for-trading-options

 

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