Not an Options Trader? Here Are Simple Options Strategies for Beginners
As you have probably found out there are dozens of option strategies and systems that one can employ in the field of options investments. If you are a beginning options investor/trader do not be overwhelmed by this multitude of different option trading strategies. You only need to learn a few basic strategies and these should be enough to allow you to start investing in options profitably.
The strategies listed below are the ones that a beginning options trader will most want to use. These option strategies are not only used by beginners but are widely, and I mean widely, used by the general investing public, professionals, as well as financial institutions. These are the most popular trading systems in the industry. They are briefly summarized below for the reader’s guidance to give you an idea of what each strategy entails.
Strategy No. 1: Buying Calls
Buying call options are perhaps the easiest way, and it is, in fact, the most popular way, to enter the options investing arena. It is also, far and away the most frequently used options trading strategy by options investors. The main reason for this is that it offers the investor the opportunity to acquire rights to a particular stock issue with very little capital investment versus the large capital required to purchase the stock outright. Not only does it require little capital to enter a trade, it also provides the biggest profit potential if/when the trade goes the investor’s way. Much bigger profit potential than owning the underlying stock. But of course, as is always the case, the bigger the profit potential, the greater the risk. While the risk is greater, it is also limited. Should the underlying stock perform negatively, the options investor knows the exact amount of his potential loss while as a stock buyer his loss could escalate rapidly and continuously if the stock goes on a downward spiral. This feature of providing potentially immense profits versus very limited and defined loss is what makes the buying of calls so popular with the investing public.
Strategy No. 2: Buying Puts
This simple options trading strategy is the one to use if the investor sees the market heading in a totally different direction from what the call option buyer views. In this method, the speculative investor buys put options in the belief that the underlying stock of his choice is or will be moving downward.
We can say that buying put options is the exact opposite of buying calls. Again, like buying calls it is also a very popular option trading strategy because of its simplicity. More than anything else it has become the favorite trading style of those stock speculators who specialize in short selling stocks. Short selling stocks is a very risky investment proposition and is in fact very closely monitored by stock brokers. Only very qualified stock investors are allowed to engage in short selling stocks. They are required to maintain a large capital balance in their broker account and have to go through a process of strict screening. On the other hand, a put option buyer does not have to go through all this investigative process and by simply buying put options he can achieve the same objective as the stock short seller, and that is, to profit on a stock that is going on a negative direction. The put option buyer is also not required to have a large capital balance with his broker.
One very large group of put buyers are those stock owners who want some kind of protection against their stock losing value in a downward movement. This is called buying protective puts and it is likened to buying insurance in this case. The stockholder buys protective puts to cover or limit any potential price loss in a declining stock s/he owns.
Strategy No. 3: Covered Calls
Now we move on to the slightly higher level of trading which is that of selling call options against stock that you own. Here again is a trading system that is widely popular not only with the investing public but also with financial institutions that have a portfolio of stocks. In this system you, the stock owner, sell instead of buy call options. This method introduces the investor to the system of selling call options to enhance returns on his stock holdings and to offer downward limited price protection on his stocks. In effect, the investor acquires two positive outcomes when he uses this strategy, increases returns on his stock and gets some protection against a downward price movement.
Strategy No. 4: Cash Secured Puts
Where buying puts is likened as the opposite of buying calls, the Cash Secured put strategy is the opposite of the Covered Calls strategy. In this instance, an investor sells puts against the liquid cash balance in his broker account or its cash equivalent. There are two groups of investors who use this strategy. The more common ones are those who sell puts in anticipation of a stock’s declining price so that they can then purchase the stock at a lower or discounted price. The other group of investors are those who have excess cash which they don’t want to tie up in a stock but still would like to generate more cash than just parking the money in a low yielding money account.
As I said at the beginning of this page, there are only a few basic strategies that the novice options trader needs to learn to start investing in options. The four strategies laid out above are it. These are the main strategies that you will be using throughout your options trading career. You may branch out to the other more complex trading systems but I can assure you these four mentioned here will always be your backbone trading systems.
Any and all information pertaining to trading stocks and options including examples using actual securities and price data, are strictly for illustrative and educational purposes only and should not be considered as complete, precise, or current. The writer is not a stockbroker and as such does not endorse, recommend or solicit to buy or sell securities. Consult the appropriate professional advisor for more complete and current information. Options involve risks and are not suitable for everyone.
© 2018 Daniel Mollat