Rookie option investors are often too eager to start trading as it looks very lucrative considering the profit potential it offers. It is vital to lay a solid foundation to understand how options work and how can you make profits by trading in options before you start investing your money into it. Here are some of the successful options strategies for beginners, that they can quickly learn and understand. Most of these strategies involve limited risk and high-profit potential.
Also Read: Options Trading Courses Online
Covered Call Writing
Using any stock you own or buying new stock, you can sell another call option of the same stock. This strategy limits the risk if the stock price goes south. You can earn a cash premium which is yours to keep, irrespective what happens. This reduces your cost. Hence, if the price of the stock declines, you might incur a loss, but you are still better off compared to owning the shares.
Cash-secured naked Put Writing
This strategy involves selling a put option on the equity you wish to own, selecting a strike price which represents the price you want to pay for the equity. You receive a cash premium for accepting an obligation for purchasing equity at the strike price.
You might not purchase the stock but can keep the cash premium as a consolation. Maintaining adequate cash balance in your trading balance for buying the equity, in case the owner decides to exercise the put option, in such a case you are considered cash-secure.
This strategy is similar to a covered call but comes with the addition of a put option. This put acts as a form of an insurance policy which limits your losses to a minimum. Your profits are limited using this strategy and are suitable for conservative investors, who prefer a good trade-off and limit their gains in return to limit their losses. Even though the profit potential is low, this strategy is one of the most popular among all the successful options strategies for beginners.
This strategy involves buying a call option and selling another, or purchasing a put option and selling another. Both these options need to have the same date of expiry. This is referred to as a credit spread as trader collects cash for making the trade. Hence, the option which is priced higher is sold and in lower priced, further out of option is purchased. This trading strategy has a market bias, i.e. the put spread is bullish, and the call spread is bearish. Thus trading strategy limits both your profits and losses.
This trading strategy involves a trading position which has one put credit spread and one call credit spread. Profits and losses are limited using this strategy as well.
Also referred to as the double diagonal. Such spreads involve options which have different expiration dates and different strike prices. The double diagonal strategy can be deployed in two methods. These are:
- The Option purchased has an expiry later than the option which has been sold.
- The option purchased is further out of cash compared to the option sold.
When a trader owns both these positions at once, it is known as a double diagonal spread. This one is our personal favorite among all the successful options strategies for beginners. You can read more about diagonal spreads in the below article:
While trading in options might sound exciting, it can be similar to gambling, if done without a sound trading strategy. Rookies in options trading need to have a tested trading strategy and sound knowledge of how options work and how can you make profits by trading in options