Let’s face this; option trading for beginners is indeed not a cakewalk as it requires you to work on an effective, proven and precise plan for successful option investing. Whether to buy or to sell calls or puts, covered calls or protective puts? Which could be the best ‘strike price’ to sell or to buy the options? Are there any effective strategies which can boost return on your investment? Well, these are just few of the many important questions to ponder on if you are serious to dabble a bit in the financial market.
In fact these are also the most important areas where you need guidance to earn profit; hence you need something dependable, something bolder, something which is precise to make option investing a risk free affair. This is exactly where option trading for beginners’ strategy comes into play.
As a beginning option trader you're probably familiar with the concept of buying puts and calls. Well, these are the most basic low-risk option strategies and are pretty easy to understand also. Face this; you buy a put as you want the underlying security to go down in value, again when you purchase a call you literally cheer for the underlying security to rise in value. Yes, you are right, either way your risk exposure is just limited to the premium which you pay for buying the contract.
It might seem easy to buy puts and calls especially for the beginners. But to take your financial portfolio to the next level, it is also the time to broaden the horizons and to look for other strategies. As a matter of fact, now with so many different options strategies available, there is always a way to make profit.
The Covered Call: - Yes, you have read it right, covered call writing is one of the most conservative options strategies because here the contract you write is ideally backed by the ownership of your underlying stock. Let’s take an example here, say you own 500 shares of the blue chip stock like Microsoft. The best part is, Microsoft is not that volatile hence stands as an ideal candidate for covered call writing because it is always advisable to write calls on stocks that aren't very volatile
The Married Put: - This is another conservative option investing strategy. These are quite similar to the covered calls however there is a thin line of difference. In married puts you would be long on the puts, however as you own the underlying stock, the puts start acting as a hedge. In a nutshell the married puts provides you the way to make money even if the stock declines.
The Bull Call Spread: - In this trade, you buy calls at one strike price and sell the amount of the calls at a much higher strike rate. Let’s say you bought 5 Microsoft 25 calls, in this trade, you might sell 5 Microsoft 28 or 30 calls. However there is a catch, i.e., the contracts should have the same expiration month and underlying security. Yes, this is the bullish strategy.
The Bear Put: - The cousin of the bullish call is the bear put spread. Here you can buy puts at one strike price and can sell the same puts at a lower strike price. Gains and losses both are limited here.
The Collar: - As you can make out that now a lot of option strategies protect investors, the protective collar is just one amongst these. With a protective collar you will be able to purchase an out-of-the-money put option and also can sell an out-of-the-money call option on the same security. This option investing strategy is mostly employed by the investors.
Last but least-- DO NOT jump into option investing game without doing your homework. Do some reading, reseach some strategies, paper trade. When you are reading for real trading, start small; limit your risk.
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