Options Trading Strategies for Beginners: From Basics to Tips for Success – Part 2

Options trading strategies involve a combination of buying and selling options contracts. These contracts can generate profits, hedge risk, or create income streams. There are several types of options trading strategies that beginners can use to get started with options trading. In Part 2 of this three-part blog, we will focus on three of these strategies and their implementation. 

1. Long Call

This strategy involves buying a call option to profit from a rise in the underlying asset’s price. The trader pays a premium for the option, which gives them the right to buy the asset at the strike price. If the asset price rises above the strike price, the trader can exercise their option and make a profit. The risk in this strategy is limited to the premium paid for the option.

Example of a successful implementation of this strategy:

A trader bought a call option on Apple Inc. (AAPL) stock with a strike price of $310 and a premium of $5 per share. As the AAPL stock rose in price, the trader exercised the call option and bought 100 shares of AAPL stock at the strike price of $310 per share. The trader sold the shares at the market price of $327 per share, generating a profit of $1,700 or a return on investment of 340 percent. The risk in this strategy was limited to the premium paid for the call option.

2. Long Put

This strategy involves buying a put option intending to profit from a decline in the underlying asset’s price. The trader pays a premium for the option, which gives them the right to sell the asset at the strike price. If the asset price falls below the strike price, the trader can exercise their option and make a profit. The risk in this strategy is limited to the premium paid for the option.

Example of a successful implementation of this strategy:

A trader bought a put option on Tesla Inc. (TSLA) stock with a strike price of $600 and a premium of $30 per share. As the TSLA stock declined in price, the trader exercised the put option and sold 100 shares of TSLA stock at the strike price of $600 per share. The trader then bought 100 shares of TSLA stock at the market price of $500 per share, using the proceeds from the sale of the put option. The trader realized a profit of $10,000, or a return on investment of 333 percent. The risk in this strategy was limited to the premium paid for the put option.

3. Covered Call

This strategy involves buying an asset and selling a call option on that asset. The trader collects a premium for selling the call option, which gives the buyer the right to buy the asset at the strike price. If the asset’s price remains below the strike price, the trader keeps the premium and the asset. If the asset price rises above the strike price, the buyer will exercise their option, and the trader will sell the asset at the strike price. This strategy can generate income for traders, but the profit potential is limited.

Example of a successful implementation of this strategy:

A trader who owned Microsoft Corporation (MSFT) shares sold a call option with a strike price of $170, which expired out of the money. The trader kept the premium of $500, representing a 3.1 percent return on investment. The trader could repeat this strategy every three months, generating additional income from the shares while keeping ownership of the shares and the potential for future appreciation in value. The risk in this strategy was limited to the downside risk of owning the shares.

Conclusion

Beginner traders can use various strategies to start options trading, including long call, long put, and covered call, among others. Each strategy has benefits and risks, and successful implementation requires careful analysis of market conditions and asset prices. By understanding the different types of options trading strategies and their potential outcomes, beginners can make informed decisions and develop effective trading strategies. Read Part 3 for more inside options strategies and how to implement them to make profitable trades.

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