Options TRADING Strategies
Options are a financial term that defines the owner of a particular asset looking to buy, trade or sell the said asset for a price that was pre-determined. The strike price is what the price is often referred to as. It is important for you to be aware that options frequently have time limits and if they are not taken in the right time frame they are no longer of any value.
Below are some different options trading strategies which you can use to profit from these financial instruments.
Different options strategies:
- Covered call is a popular strategy in which options are made use of. The call option lets the owner get the security at the strike price any time before expiration. In this strategy the investor holds the security and writes a call option. In this way he gets a premium which is the payment for selling the option. However the investor now becomes obligated to sell the security he holds if the option is exercised. The objective is to minimize risk.
Therefore if the stock price declines the investor’s premium partly offsets his capital loss on the other hand if the stock price increases the investor will be obligated to part with the stock. The good thing about this situation is that because the stock price has increased the investor also realizes a capital gain.
- Protective put is another hedge in which the investor holds the stock which is referred to in the option contract. In this case he buys a put option which lets the contract holder sell a given security at the strike price. Therefore the investor who utilizes a protective put will realize a capital gain in the case of the stock price increasing or will be allowed to sell at above the stock’s market price if there is a decrease in value.
- Equity Collar is a more complicated approach to options trading. In this case the options investor holds a position in stock. To reduce risk he buys put and sell calls. For the call the strike price will be above the current market price of the stock and for the put it will be below the current market price. This keeps the investor protected from price fluctuations in the security.
What happens is that if the price decreases the put option allows the investor to sell the stock at a higher value than the market price and if the price increases the investor will have to sell but will get a capital gain. If it happens that the price remains stable then the premium on the sold call option will cover the price of the bought put option. Wanting to reduce their risk exposure investors quite often use this strategy however they don’t wish to part with a stock.
Below are some different options trading strategies which you can use to profit from these financial instruments.
Different options strategies:
- Covered call is a popular strategy in which options are made use of. The call option lets the owner get the security at the strike price any time before expiration. In this strategy the investor holds the security and writes a call option. In this way he gets a premium which is the payment for selling the option. However the investor now becomes obligated to sell the security he holds if the option is exercised. The objective is to minimize risk.
Therefore if the stock price declines the investor’s premium partly offsets his capital loss on the other hand if the stock price increases the investor will be obligated to part with the stock. The good thing about this situation is that because the stock price has increased the investor also realizes a capital gain.
- Protective put is another hedge in which the investor holds the stock which is referred to in the option contract. In this case he buys a put option which lets the contract holder sell a given security at the strike price. Therefore the investor who utilizes a protective put will realize a capital gain in the case of the stock price increasing or will be allowed to sell at above the stock’s market price if there is a decrease in value.
- Equity Collar is a more complicated approach to options trading. In this case the options investor holds a position in stock. To reduce risk he buys put and sell calls. For the call the strike price will be above the current market price of the stock and for the put it will be below the current market price. This keeps the investor protected from price fluctuations in the security.
What happens is that if the price decreases the put option allows the investor to sell the stock at a higher value than the market price and if the price increases the investor will have to sell but will get a capital gain. If it happens that the price remains stable then the premium on the sold call option will cover the price of the bought put option. Wanting to reduce their risk exposure investors quite often use this strategy however they don’t wish to part with a stock.