If you have already mastered how to invest in stock markets, trading stock options enhances the diversity of your investment portfolio. It offers better flexibility and versatility than most other securities. As a result, traders find adjusting investments according to market conditions much easier with options. In fact, you can trade stock options in a conservative or speculative manner, depending on your investment experience. Just like any other investment method include in beginners’ stock market vocabulary, stock options carry a certain amount of risk. However, proper application of stock options trading strategies can lower risks. To increase your chances of substantial financial gain, this post discusses some of the best trading stock options strategies.
Covered call is a simpler stock options strategy that allows you to purchase stocks outright. At the same instant, you have to write a call option on these recently purchased stocks. By writing or selling shares like Intuit stock, you allow the buyer to purchase stocks at specific fixed prices. Although this strategy limits your chances of profit, it gives you greater safety from losing money. Even when the price of stocks fall, you will earn a cash premium from the buyer. Moreover, a covered call strategy is ideal for investors who have short term position and neutral opinion on the asset. It enables investors to earn additional profits while safeguarding your investments from sudden decline of underlying asset value. Finally, a covered call is effective way of trading stock options to reduce the volatility of investments.
One of the popular stock options strategies, a long call strategy is often used by inexperienced investors. You will not see it used by anyone at Soros Fund Management, that is for sure. Bullish investors who are afraid of risking capital use a long call strategy. However, making profit on a long call strategy is comparatively difficult. Understanding and practicing long call prepares investors to utilize other more complex trading stock options strategy. Furthermore, long call trade limits the potential loss of a trade. Meanwhile, the upside earning potential is quite substantial. To make long call trades profitably, you should closely observe the movement of underlying asset value. Try to notice the number of points it moves in a particular direction. Then, calculate the maximum gain, maximum loss and break even points to earn a profit from long call option trading. Due to limited lifespan of options, applying long call strategy at the right time is the key to profitable earnings.
To apply the married put stock options strategy, investors must first buy or own a certain number of shares. Then, they can invest in put options on their shares. Investors utilize this options trading strategy when they want to protect their investment from short term losses. Those who are bullish about prices of their assets recourse to married put strategy, protecting their investment. In fact, married put strategy works like a safety net, preventing heavy losses if the share prices decline dramatically. This may be a safer option for those considering investing in aluminum futures.
Calendar spreads, also known as time spreads and horizontal spreads, allow you to enter long and short positions simultaneously for the same asset. However, they account for different delivery months. This spread trade strategy involves simultaneously buying futures that expire on a certain date and them sale of them on another date. A calendar spread is often used to take advantage of implied volatilities differences between options for two different months. If you are a beginner, this is a great option to consider.
Bull Call Spreads
The bull call spread is a vertical spread strategy that projects a modest upside, helping the investors stay on the safe side of trading options. In order to apply this strategy, investors acquire same number of long and short calls. Since the price at which calls are sold is higher than the price paid to purchase them, the investors can make a profit. But, the call options you buy and sell should have the same number of underlying assets and expiration month. If bull call spreads strategy fails to work out, the maximum risk will be the debit paid to make the initial trade. When you are certain about a modest rise in underlying asset price, whether it involves Oracle Corp stock or some other shares, using bull call spreads strategy may prove beneficial.
Bear Put Spreads
If you do not already know all of the most common investment definitions, you should learn those to help you understand this strategy. Bear put spread is another vertical spread options strategy. This technique is characterized by investors purchasing put options at a particular strike price and then selling an equal amount of puts at the lowest strike price. Do not use this strategy unless you identify as a bear investor and are expecting the asset price to take a downward turn in the near future. You will not gain much using this strategy, but you also will not lose much. Keep that in mind.
Another effective stock options strategy is the long straddle. To appropriately engage in trading stock options this way, investors have to buy call and put options at same strike price. Moreover, the underlying stocks of the options should have same value and expiration date. Investors use a long straddle trading strategy when they are unsure about which direction the underlying asset value will move. What’s more, this strategy will limit chances of loss without overly restricting gains.
There are many different trading stock options strategies that you can use to make considerable earnings from your investments. If you are not quite ready to begin trading Forex assets, trading options may be your best next step. Understanding the different options trading strategies enables investors or investment bankers to select the right one for their circumstances. More importantly, knowledge of these different strategies give you greater flexibility in trading stock options.
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