Sunday, December 16th, 2018

Best Option Trading Strategy

 

Option trading strategies can be simple and they can be complex. The best route for beginners is to stick with the basics. Here is what Futures Magazine had to say about options strategies for beginners.

In a covered call (also called a buy-write), you hold a long position in an underlying asset and sell a call against that underlying asset.

Bull call spreads and bear put spreads also are called vertical spreads because they occur in the same month and they have two different strikes.

Another strategy used in options is calendar, or time, spreads. In a calendar spread, you establish your position by entering a long and short position at the same time on the same underlying asset, but with different delivery months.

The iron condor is a strategy that can be a good introduction for beginning options traders to option selling. It can be a relatively safe way to sell options because you can’t lose on both sides of the trade.

We believe that the best option trading strategy of these four for beginners is the covered call.

Covered Call Option Strategy

According to Investopedia a covered call is

often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium.

This is also known as a “buy-write”.

The beauty of a covered call is that you never lose any money in the trade. If the stock goes up in price the buyer will execute the contract and you might lose out on some gains but you get the premium. And if the stock stays flat or falls in value you keep the stock and get the premium.

Why Use an Option Trading Strategy?

If you are sure that shares of XYZ Corporation will go up in the near future you will buy a call on the stock and if you believe that they will fall in the near future you will buy a put. But what happens if your analysis is wrong? The best option trading strategy is one that increases your odds of making money and limits your downside risk. A useful strategy in a volatile market is a long straddle.

A long straddle is buying both a call and a put on the same stock with the same expiration date. In a long straddle options strategy the worst a trader can do is lose the cost of the premiums paid for the call and the put if the stock does not change price. However, this options trading strategy has potentially unlimited potential if the stock price changes significantly.

The risk in this case is limited to the two premiums and the advantage is that when you do not know which way the market will move you are covered in both directions.

Other option trading strategies use mixtures of calls and puts, buys and sell, in order to cover the cost of the trade with premiums on one side while aiming for profits on the buy side. More complicated strategies are often constructed to take advantage of market inefficiencies but are best left to experienced traders.

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