Best 10 Tips For Options Trading Training

Best 10 Tips For Options Trading Training

Many traders are not aware of the strategies available to them with stock options, leaving them unfamiliar and unsure of how to take advantage of their asset class. With a little time and effort, traders can learn about the flexibility offered by stock options and maximize their returns.

Review 10 options strategies that every investor should know.

There are a lot of strategies you can use for investing that are basic. Options trading is one of these. If you’re looking to enhance your returns or protect your existing positions, it has got you covered. You can take options trading training online in various platforms to master in it.

These three strategies are most often used by the best trading company in the world when already owning the underlying shares. The spreads strategy involves picking one or more options, and simultaneously selling another option (or options).

1. Covered Call

Investing in a call option can be an effective way to reduce forex trading risk without having to sell shares of stock, but it does come with the downside of being better protected if things go south. That trade-off is that you are more tied to your money while the other possibilities are untethered. To execute the strategy, you buy the underlying stock as you normally would and simultaneously write (sell) a call option on those same shares.

Instead of the strategy where an investor buys 100 shares of stock and simultaneously sells one call option, assume that the investor has a short call position on the stock and makes a long stock position. In this case, the investor’s short call is covered due to their long stock position.

If an investor is going to hold a stock for a short amount of time, they might want to sell the premium they’re earning on their call option. This can be done by harvesting the delta, which would remove the risk that you will lose money due to increased volatility.

2. Married Put

The investor buying the asset and put options will be very happy. The holder of the put option can sell 100 shares, at the strike price, when it is beneficial for them to do so.

Investors may use the put option as a way to protect their downside risk on stocks. This strategy is usually used in case the stock price falls and establishes a floor for how low it can go. The put option is also know as an insurance policy.

Suppose an investor bought 100 share of stock and bought one put option. This strategy could be appealing for this investor because they are protected to the downside, if the stock value decreases. In addition, the investor would have equal opportunity in experiencing all of the upside gains if the stock does not fall in price. However, the disadvantage of this strategy is that if the stock does not lose value, the investor will lose their premium on their put option.’

When the stock falls in relation to the premium put, the losses are limited. However, a married put gathers in the same trading opportunities as a long call.

3. Bull Call Spread

In this strategy, an investor simultaneously buys at a specific strike price as well as sells at a higher one. Both options have the same expiration date and underlying asset, which occurs in both call options.

This strategy is often used when an investor buys a ETF or stock with higher dividends and expects the price of the underlying asset to rise moderately. By reducing their upside and net premium, they are able to avoid concern over market volatility.

4. Bear Put Spread

The bear put spread also known as a vertical spread is another form of option strategy that allows an investor to buy the same number of options at two different strike prices. It is primarily used when the investor has a bearish sentiment about the underlying asset and expects the asset’s price to decline.

The probability of the strategy succeeding depends on the stock’s fall in price, which limits your upside. In order to offset the cost of buying a put option and selling a call option, bear put spreads are often used by investors who expect volatility.

5. Protective Collar

If an investor wants to protect their investment in a company, they can wager against their own investment by buying a put option while simultaneously selling a call option of the same expiration.

When investors make a long position in stock, they often hold on to the put option as it gives the investor downside protection. However, the downside is that the trade-off is that they will be obligated to sell shares at a higher price and forgo any further profit.

If the investor is long 100 shares of IBM at $100 as of January 1, they could “open” a collar by selling one IBM March 105 call and simultaneously buying one IBM March 95 put. The trader would be protected at $95 until the expiry date, but with the trade-off of being obligated to sell their shares at $105 if IBM trades above that price mid-way through the contract before expiration.

Traditionally, this would be a covered call and a long put. The trade-off is that investors are exposed to short term risk and uncertain payoffs in the stock when compared to other trade setups. However, traders are more likely to find happiness in the upside potential if they have already been making put profits from their stock investment.

If you’re uncertain which direction the underlying asset will move, using an options strategy called a long straddle is a wise choice. You purchase a call and put option on the same underlying asset with the same strike price and expiration date.

If done correctly, this strategy gives the investor multiple gains. These gains would all be theoretically infinite, as long as the total losses aren’t greater than both options contracts combined.

Performance depends on the stock’s direction. The investor’s capital goes to waste if the stock doesn’t go up more than the premium paid for the position.

An investor uses a long strangle options strategy with a combination of out-of-the-money call and put options. The investor believes the underlying asset will go up or down dramatically or be volatile in a different direction, but is unsure which of the two it will be.

With this strategy, you are betting on the news related to the earnings release of a company or the FDA approval of a pharmaceutical stock. Wagers can make up losses in costs with only premium spent on these options. These options will almost always be less expensive than straddles because they are out-of-the-money.  Free day trading software is available online to try out these methods by yourself.

6. Calendar Spread:

A calendar spread involves trading options with one expiration and simultaneously trading options on the same underlying in a different expiration. 

Trading Tips: 7 of the Best Option Strategies to Know - The Daily Iowan

7. Box Spread:

A box is an options strategy which creates a synthetic loan by going long a bull call spread and a matching bear put spread using the same strike prices. The result will be 2 longs and 2 shorts on the same stock with their value fluctuating until expiration. Boxes are used to borrow or lend funds to manage risk for money management purposes depending on the firm’s implied interest rate.

8. Long Call Butterfly Spread

Combining multiple positions to create a strategy is not efficient as there would be two different levels of risk (bulls and bears). Combining options is also inefficient as there are three different associated strike prices. A long butterfly spread using call options combines both a bull and bear spread strategy, with three different associated strike prices. All the strategies are for the same underlying asset and expiration date.

This example is called a “call fly” and it results in a net debit. An investor would enter into a long butterfly call spread when they think the stock won’t move much before expiration.

The greater decrease in profit occurs with the further away the stock moves from the ATM strikes and results in a “loss” of less than what was invested. This trading strategy has positive upside and limited downside.

9. Iron Condor

In the iron condor strategy, the investor sells one call and buys one call with a higher strike in the hope of making a profit when both simultaneously expire. In an iron condor strategy, the investor simultaneously holds a bull put spread and a bear call spread. Selling an out-of-the-money put option and buying an in-the-money put option of a lower strike, selling an out-of-the money call option and buying an in-the-money call option of a higher strike.

All options of the underlying have the same expiration date and are used on the same asset underlying. This trading strategy earns a net premium on the structure and is designed to take advantage of when a stock experiences low volatility. 

The greater the stock moves through the short strikes which are lower for put and higher for call, the greater loss up to total loss.

Losses are usually much higher than gains. The intuition is that this makes sense given the probability of the structure finishing with a small gain.

10. Iron Butterfly

Investors will sell an at-the-money put, buy an out-of-the-money put, buy an at-the-money call, and buy an out-of-the-money call. The same expiration date applies to all four positions. 

The strategy combines selling an at-the-money straddle and buying protective “wings.” This entails using options to write a call option with only downside risk and a put option with upside risk, which both will be in the same width, depending on the strike prices of the options and the stock being used. Investors like this strategy because they do not have to worry about large losses when trading volatile stocks that are positioned out-of-the-money.

The maximum profit occurs when the stock is below its at-the-money strike and above a long call or put. The maximum loss occurs when the stock is above its at-the-money strike and below a long call or put. There many trading companies available online with the interactive brokers pre market hours training. Follow it and master it now.

How to use Option strategies in a Sideways Market

A sideways market is when prices don’t move by much over time, meaning that it’s a low-volatility environment. Short strangles, short straddles, and long butterflies all produce premium income in this space. When the options expire out of the money (e.g., at the strike price of the straddle), then you will have the highest profits possible on writing those options.

With portfolio protection, you’re guaranteed to have a capital cushion if the market crashes. With life insurance, you might qualify but might not be able to file a claim- and it’s worth it because you won’t die early regardless of how much has lapsed during your life. The same is true with portfolio protection- if it doesn’t provide any benefits, then you’ll lose money on stock when compared to an investor who didn’t take advantage of portfolio protection.