Option Strategies - Some Common Option Trading Strategies for the Beginner
Options prices are dependent upon the prices of their underlying instruments and can be used in various combinations for virtually unlimited market moves.
When an investor contemplates any option strategy, he or she should always be mindful of the risks, since trading options is a bit more risky than simple stocks.
The most basic options strategy is referred to as the covered call.
A covered call simply involves selling (writing) a call for a stock you already own.
If the call is never exercised, then you simply retain the premium and also the stock, then you can sell another call.
If the call is ever exercised, then you would receive the exercise price of the stock, which is the strike price of the call, as well the premium you received when you sold the call.
Another options strategy is known as the protective put.
With this particular strategy, you would purchase protective puts for stocks already owned in order to minimize any losses.
If the price of the stock increases, then the put would expire worthless, but you still benefit from the increased stock price.
On the other hand, if the price of the stock decreases, then the value of the put increases by one dollar for each dollar drop in the stock price below the strike price.
So in this way, you are protected dollar for dollar.
The put then pays off with the value of the stock and the put, minus the premium for the put.
A collar is an options strategy that combines the use of a covered call and a protective put in order to contain your risk and your reward between two bounds.
This particular strategy helps to eliminate your potential losses.
The put is purchased in order to protect the lower bound, and the call is purchased and can be sold at strike price for the upper bound.
The call helps to pay for the protective put.
Still another options strategy is the straddle.
A straddle is created when both a put and a call are purchased on the same security at the same strike price and for the same expiration.
There are long straddles and short straddles.
Long straddles are purchased if the stock price is expected to significantly increase or decrease.
Short straddles are purchased if the stock price is not expected to move very much.
There are many more option trading strategies.
These are only a few of the most common ones.
When an investor contemplates any option strategy, he or she should always be mindful of the risks, since trading options is a bit more risky than simple stocks.
The most basic options strategy is referred to as the covered call.
A covered call simply involves selling (writing) a call for a stock you already own.
If the call is never exercised, then you simply retain the premium and also the stock, then you can sell another call.
If the call is ever exercised, then you would receive the exercise price of the stock, which is the strike price of the call, as well the premium you received when you sold the call.
Another options strategy is known as the protective put.
With this particular strategy, you would purchase protective puts for stocks already owned in order to minimize any losses.
If the price of the stock increases, then the put would expire worthless, but you still benefit from the increased stock price.
On the other hand, if the price of the stock decreases, then the value of the put increases by one dollar for each dollar drop in the stock price below the strike price.
So in this way, you are protected dollar for dollar.
The put then pays off with the value of the stock and the put, minus the premium for the put.
A collar is an options strategy that combines the use of a covered call and a protective put in order to contain your risk and your reward between two bounds.
This particular strategy helps to eliminate your potential losses.
The put is purchased in order to protect the lower bound, and the call is purchased and can be sold at strike price for the upper bound.
The call helps to pay for the protective put.
Still another options strategy is the straddle.
A straddle is created when both a put and a call are purchased on the same security at the same strike price and for the same expiration.
There are long straddles and short straddles.
Long straddles are purchased if the stock price is expected to significantly increase or decrease.
Short straddles are purchased if the stock price is not expected to move very much.
There are many more option trading strategies.
These are only a few of the most common ones.
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