All you need to know about the best option strategies for beginners
Market participants seek stock options as investment vehicles due to the rapid price fluctuations that present opportunities to profit handsomely in a short period. They can even suffer catastrophic losses. There are different option trading strategies with various levels of complexity, potential returns, and even stranger names. Here are some of the commonly used options trading strategies.
Best Options Trading Strategy for beginners
To employ this tactic, a trader "goes long" on or buys a call option, betting that the stock price will rise over the strike price before the option expires. If the stock price increases, traders can make back their initial investment.
A trader 'shorts' or sells a call option when he expects a sideways market or is bearish on a stock price. If the underlying stock trades below or at the strike price on the expiry date, then the call option seller pockets the premium received on selling the option.
An investor who "goes long" on a put is betting that the stock price will be below the put's strike price by the time the option expires. If the stock price drops drastically, the profit from this transaction might be very high.
Going short on a put is the inverse of buying a put and involves selling a put with the expectation that the stock price will rise over the strike price before the option expires. The maximum return on a short put is the cash premium received by the trader in exchange for selling the put. If the underlying stock price ends the day the option expires lower than the strike price, the trader must buy the stock at the strike price.
Selling a call option (or "going short") is the basis of a covered call, but there is a twist. Here, the investor buys 100 shares for each call option sold and sells the call option. When you own the stock, a short call, which can be hazardous, can become a pretty safe transaction that can yield revenue. At expiration, investors anticipate that the stock price will be lower than the strike price. If the stock price exceeds the strike price, the call option owner must sell the stock to the call buyer at the strike price.
Benefits of Options Trading
• One can reduce exposure to potential losses using the best option trading strategies. For instance, the risk of a stock position can be reduced by purchasing a lower put option. If you buy a put option at Rs 800 for a premium of Rs 5, and the stock drops to Rs 800 while you own it, you will only lose Rs 15. That's the beauty of options; your loss is fixed, no matter how low the price drops.
• The cost of keeping a stock can be reduced by using options. For instance, if you own stock and the price is stagnant, you could sell more excellent call options to generate income and reduce the asset's carrying cost.
• One of the primary advantages of trading options is the lower transaction costs. Options allow the trader to enter a position with minimal capital outlay. For Rs 80 per share, for instance, an investor would need to fork over Rs 16,000. If they instead buy call options with the same delta, the premium would be closer to Rs 4,000.
• With the best options and strategies for beginners, you can increase your earnings potential, or put it another way, your returns could be multiplied. In this way, how. Therefore, the option provides the same return as buying the stock outright if the strike price is correctly determined. Since we are purchasing options at a discount and making a profit, our return on investment (ROI) will be significantly larger than if we had purchased them at full price.
How does Option Trading work?
The crux of options contract valuation is determining the likelihood of certain future price events. It stands to reason that the cost of an option that profits from a specific occurrence would rise as the likelihood of that event increases. For instance, the worth of a call option rises in tandem with the value of the stock underlying it. The relative worth of possibilities can be understood by keeping this in mind.
Generally, an option's worth decreases as its remaining time to expiration approach zero. This is because, as the time nears expiration, the likelihood of a price change in the underlying stock decreases. Because of this, options are a poor investment. If you acquire an out-of-the-money one-month option and the underlying stock doesn't move, the value of your option decreases each day. A one-month option will be worth less than a three-month option due to the time value of money. That's because having more time on your side enhances the likelihood of a favourable price movement and vice versa.
That's why the identical option strike with a one-month expiration date costs more than the same strike with a three-month expiration date. Time decay is responsible for options' squandering nature. If the stock price stays the same, then the value of the matching option will decrease from today to tomorrow.
Options provide traders with various ways to profit from the underlying equities they trade. Options, underlying assets, and other derivatives can be combined to create a wide range of strategies. Purchasing calls, purchasing puts, selling covered calls, and buying protective puts are the four cornerstones of the beginner's options portfolio. Options strategies provide some downside protection and the potential for leveraged gains, but it also comes with certain drawbacks, such as the need for an up-front premium payment. Selecting an options broker is the initial step in options trading.
Q. Can one expect to make money when trading options?
With options, the maximum loss for the buyer is the premium they pay for the contract. However, the risks for option sellers are high. It's not always the case that option buyers lose money; there are situations in which they gain.
Q. How would one get started with options trading?
In options trading, investors analyze a stock and market, in general, technically and fundamentally. The buyer or seller of an option contract has the right but not the obligation to acquire the underlying asset at the strike price and on the expiration date specified in the contract.
Q. Are options possible for novices?
Investors with less experience may be put off by the perceived complexity and risk of options trading. However, even beginner investor can protect their capital and hedge against market risk by employing a few elementary tactics using options.
Market participants follow various styles of trading. Some like to enter and exit in a few minutes, while others like holding a position for a few days. Check out some more trading strategies in this blog.