Most of us are familiar with the stock market, how it works, and the basics behind buying and selling stocks. However, those are not the only options when it comes to the stock market, as there are also options trading. Here is a look at some trading strategies that can help you boost your bottom line.
What Are Options?
Options trading involves giving someone an option to buy or sell a stock at a certain price. As the name implies, it doesn’t require any buying or selling, but it simply locks in the price of purchase or sale. Options come with a variety of limitations and risks, including time limitations before the option expires or the possibility that a price will move in an unexpected direction. As such, they are considered derivatives, meaning that the price of the option itself flows from the price of another item – in this case, the price of the stock in question.
Options, like any other stock purchase, are not free. You will pay a premium for the price of purchasing an option. The price of this premium must be factored into any profit or loss estimate.
What Are Some Good Options Trading Strategies?
There are many options trading strategies. Of course, not all will work for you, and you should consult with a financial professional to decide what plan works best. Some sample options include:
Calls and puts are the most basic options strategy. You purchase a call when you believe a stock’s price will rise. If a price rises, you can use your option to make an extensive profit by buying the stock at the time that you purchase the call option. In theory, the profit margin is unlimited, while the loss is limited to the price of the premium that you pay.
- Long Puts:
As you would imagine, puts are the reverse of calls. You purchase put options when you believe that a stock price will fall. A put option will become more valuable as the stock price decreases. These are great options to purchase if you believe that a stock price will fall, but are concerned about risk. It is less risky than short selling because the loss is limited to the premium you pay for the option if the stock price rises.
- Ratio Spread:
According to Tastytrade, the ratio spread strategy is, “something you engage in when you are bearish on a stock,” meaning that you think the stock will fall. In this scenario, you purchase a put option, which will gain value as the stock price decreases. You will also sell two options at a lower strike price, enabling you to profit if the price does decline. If the price increases, all you lose is the price of the premium paid when the option expires.
Options trading can be complicated, so make sure you fully understand what you are getting into before you make a purchase. These basic strategies can help get you started