Options, as the name implies, are contracts that provide the option for the contract holder to buy or sell an underlying financial product, such as shares of company stock, for a predetermined price. What makes options an attractive investment vehicle is that they amplify potential returns on a relatively smaller position size. At the same time, however, options also amplify the potential losses.
Fortunately, options trading is something that beginners and ordinary traders can pursue and succeed in. You don’t necessarily need the financial resources that Wall Street hedge funds have at their disposal or the industry expertise that leading economists possess. Here are the top options trading strategies you can use:
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For those who are wondering –how do I trade options? Perhaps the simplest way is to purchase a long call options contract. In this strategy, you go long on an underlying asset and expect that asset to surpass the option’s strike price before or at expiration. The potential return on a long call is uncapped while the potential losses are capped and equal to whatever initial amount you paid for the contract.
With a covered call, you are bearish on the value of an underlying asset and are effectively selling a call option. There’s an added twist of having to buy the underlying asset, which equates to 100 shares of stock for each covered call you buy. Traders who sell covered calls, however, can generate income as covered calls pay a premium of $100 per contract. Note that the potential return on a covered call is limited to that premium you initially receive for each contract that you sell.
Buying a long put contract means that you are bullish on the outcome of a put contract. That is to say that you expect the underlying asset’s value to be below the predetermined strike price when the contract expires. The potential gain on a long put trade is uncapped and can be X times the initial investment that you paid to buy the contract, albeit this requires the stock’s price to drop substantially. Finance platforms, like SoFi, can help you make better trading decisions by providing useful resources on where and when best to trade, what range of figures you can use to gauge the value of an options contract, and proper risk management measures to limit capital losses.
Strangles & Straddles
Strangle and straddle are two different strategies commonly used in options. Both strategies allow a trader to benefit from substantial price changes in the underlying asset’s value rather than the price direction. Both strategies also revolve around purchasing an equal number of calls and putting contracts that bear the same expiration date. The key differentiator between the two strategies is that a strangle bears two different strike prices while a straddle only has one.
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Finance platforms, like SoFi, can help you make better trading decisions by providing useful resources on where and when best to trade, what range of figures you can use to gauge the value of an options contract, and proper risk management measures to limit capital losses.