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5 options trading strategies that beginners must know

Options trading is an excellent option for position trading and risk management. How much you can make out of it would however depend on the options trading strategies that you use. There are several options trading strategies to choose from. Picking the right strategy would depend on your individual goals and the market condition.

Given below are the 5 trading strategies that you must know if you are starting options trading

Covered call-also known as a buy-write, in a covered call, you hold a long position in an underlying asset and sell a call against that particular underlying asset. The market position should be neutral to bullish on the underlying asset. In case of covered call, the maximum profit is limited and the maximum loss is significant. If market volatility increases, it has an adverse effect. And if it decreases, it results in positive effect. When the underlying asset moves against you, the short call offsets some of your loss. Traders use this strategy to match overall market returns with reduced volatility.

Bull call spread-In a bull call spread, you buy a call on the underlying asset while selling a call on the same underlying asset simultaneously, with the same expiration month at a higher strike price. Traders use this strategy when they think the market will go up slightly or it is more likely to rise than fall. The profit is however limited because the price that you pay for the call with the lower strike price is partially offset by the premium received from writing the call with a higher strike price. There is basically a less risk involved for losing the premium paid for the call.

Bear put spread-bear put spread is reverse of bear call spread strategy. In a bear put spread, you buy a put on an underlying asset while writing a put on the same underlying asset with the same expiration month, but at a lower strike price. Traders use this strategy when they think the market will fall slightly or is more likely to fall than rise.

Married put-In a married put strategy, an investor who purchases a particular asset simultaneously purchases a put option for an equivalent number of shares. Investors use this strategy when they are bullish on the asset’s price and wish to protect themselves against potential short-term losses. This strategy basically functions like an insurance policy, and establishes a floor in case the asset’s price may plunge dramatically.

Iron condor-this options trading strategy is a good strategy for beginners for option selling. It offers a relatively safe way to sell options because you can’t lose on both the sides of the trade. In case of iron condor, you pick a likely trading range for an underlying asset and sell out-of-the-money option spreads around that range. You can enter the iron condor from both the short side and long side.

To learn about other option trading strategies, you may subscribe to options trading newsletter or look for them online to maximize your chances of success.

This was posted in Bdaily's Members' News section by Joe Anderson .