Looking to boost your income quickly? Enter the world of ‘Options Trading’! It’s not just a way to level up your financial game; it’s a ticket to expanding your portfolio beyond the typical stocks and bonds. And the secret to its popularity is that you can turbocharge your earnings in record time!
But here’s the rub: Lots of traders get into this without nailing down the ‘Options Trading Strategies’. As a result, they end up losing a considerable amount of capital and facing tough situations.
For your ease, we came up with this article, in which you’ll learn the top 6 options trading strategies which most successful investors use. However, please note that the strategies might seem a bit tricky at first, but putting in a little effort will show you how valuable options trading can be
What is Options Trading?
“Options Trading is a digital contract that allows you to buy or sell a specific security for a specific period.”
This time frame can be as short as one day or longer than a month or even a year. According to Bloomberg, Options are the hottest trade in 2023.
Traders utilize this trading method when they have concerns about a decline in the index market. In such cases, the investor would have the least risk by selling out the “PE” (Put European Options) on the buying rate, even if the market drops down.
Top 6 Options Trading Strategies For You
With so many people entering the world of the options trade market, it’s important to implement the right strategies for profitable investment.
Regardless of the type of your trading, all these strategies work on two pillars; The call and the Put.
Below are the top 6 Options Trading Strategies that you can leverage in your next investment. Keep in mind that these methods are not risk-free at all. Rather they help to minimize your risk and increase profit chances.
1. Covered Call
One of the best approaches toward profitable options trading is known as the Covered Call. The idea is to buy underlying stocks and sell out the call options at a specific price at a particular time. This is normally done when traders feel that the price of the share is going to rise sooner or later.
The investor buys the stock and offers to sell outcall options at a fixed price, known as the strike price. As soon as the share price reaches the strike price, you are bound to sell out your call options before the expiration date. This approach minimizes the risk factor, especially for beginners.
2. Bull Call Spread
This three-word combination is also known to be a profitable options trading strategy. The traders buy a particular share at a specific price predicting that the market will rise.
At the same time, the trader sells a second call option at a higher strike price within the expiration date. This strategy works great even if the market closes below the strike price because you are already selling at a higher price than your buying investment.
3. Bear Put Spread
This Strategy works great when traders realize the market is going to drop. The investor buys put options of a particular stock at a specific time. Simultaneously, he sells out another put option of the same stock at a low price.
This provides an opportunity to minimize the cost of your previous buying rate. Moreover, you will be able to cap some potential profit after selling your put option if the share price drops significantly.
4. Long Straddle
There are times in the trade market when you feel the market is going significantly out of range. In such a situation, the ratio of profit and loss has no limits. As a result, the traders simultaneously buy a call and a put option of the same underlying asset.
Such option trading strategies require more capital since we are going to buy both calls and put options. However, if the market goes up, the profit ratio will cover the entire cost. Contrary to this, there will least risk of losing capital in case the market drops down
5. Married Put
This strategy is helpful when you own an underlying asset but fear the price might drop down in the future. In such cases, we buy a put option of our stock and a chance to sell the same stock at a strike price within the time frame.
In simple words, you buy insurance for your stocks as options.
If the price drops below the strike price before the expiration date, you will be able to cover up your loss by selling at a better price. The premium fee for buying the put options is the most you are likely to lose.
6. Protective Collar
It gets easier to predict the market of a particular stock after investing in it for some time. Once you understand the market behavior of that asset, it’s time you choose the “Protective Collar Options Trading Strategy” to leverage your business.
The buyer buys a put option and sells a call option of the same stock at the same time. The put option is if the price drops down out of nowhere, one will have to right to sell the stock at a particular fixed price.
Likewise, the trader sells the call option allowing someone else to buy stock from you at a higher price to minimize any kind of loss. The profit from selling out the call option will offset the amount of buying the put option.
Final Thoughts
Here’s the deal: By now, you’ve seen how these Options Trading Strategies can work wonders in the trading world. The ultimate aim? Keep those risks low. Be it forex or options trading, cutting down on risk is crucial. Remember, not every method works every time. But the trick is to leverage these options trading strategies to maximize your returns.
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