Options trading is often looked at as a high risk high reward strategy, which it is. Many beginners have been burned trading options, so it’s important that if you wish to dive in, that you educated yourself, and ensure you’re taking appropriate risks. Below we’ll talk about what options are, and some basic strategies for beginners to learn about.
What is the Options Market?
An option is a contract of rights and obligations between two parties, which is traded on the Stock Exchange. Trading in options contracts takes place for a certain period, of purchase (Call) or sale (Put), and are linked to a number of shares, for a fixed price, called the strike or strike price.
Options are derivatives and the negotiations of these contracts depend on other assets. The main function of these contracts is to manage risks for a certain amount, called a premium. Therefore, the options market negotiates the purchase and sale of an asset that is inside a paper.
How does the Options market work?
The options market is linked to fluctuations in the prices of assets. These can be shares of stock, commodities, or some other asset. Therefore, options are derivatives of these assets, and each option has a type: call or put, an expiration date, a standard lot of minimum quantity to be traded and an exercise or strike price. Every option negotiation can be called a contract, where there is a buyer and a seller thus generating rights and obligations.
Strategies for beginners
1 – High lock with calls
Locks are two-pronged operations, they stabilize the energy and risk of options which, when alone, are very strong. And this stabilization allows investors to make much larger operations with controlled risk.
2 – Low lock with puts
The low lock with puts, on the other hand, follows almost the same reasoning as the high lock with calls. It is also a directional operation, but downwards and it is a debit operation, that is, you pay to set up.
3 – Butterfly
The butterfly is an operation that must be mounted when it is expected that the market remains stable and that there are no major fluctuations. It is made up of three options (three legs), which form a perfectly symmetrical position.
4 – Short sale
Short sales are operations in which the investor sells options, both calls and puts, and cannot bear the risk of the operations.
5 – Straddle
Straddle is a classic volatility buy operation, it is nothing more than buying a call plus buying a put in the money, with the same strike and maturity.
To dive in fully to these trading strategies would take a much more time, so this is simply meant to pique your interest. If you want to jump into options trading, make sure to fully investigate the strategies you wish to pursue, and ideally consult with a financial professional. It’s also a good idea to make a number of play trades before you start investing real money and remember to never invest more than you can afford to lose. Options are considered high risk, high reward, for a reason.