Options are a derivative financial instrument which provides the buyer of the option with the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified price (the "strike price") within a specified time (usually until expiration).
There are two main types of options: calls and puts. A call option gives its owner the right to buy an asset at a certain price within a certain time frame. Put options give their owners the right to sell an asset at a certain price within a certain time frame. There is also something called "intraday trading". This is when you trade stocks within one day. Some people use this strategy because they don't want to commit too much capital on one stock and they don't want to wait for days for their investment to pay off.
A beginner trader can use the following strategies to trade options:
1. The Calendar Spread: This strategy involves buying a call option and selling another call option of the same type with a different expiration date.
2. The Collar: This strategy is used to reduce the potential risk of an option trade. It involves purchasing an out-of-the-money put option and simultaneously selling an out-of-the-money call option with a higher strike price, which limits the maximum profit from the trade to the premium received for selling that call.
3. Iron Butterfly: This strategy is created by buying one out of the money put, one in the money put, one out of the money call, and one in the money call for a net debit or net credit depending on how far away
Before we dive into the strategies, it’s important to know the basics. The first thing is to know what an option is. An option is a contract that gives you the right, but not obligation, to buy or sell an underlying asset at a specific price and by a certain time.
Option Strategies for Beginners
There are three basic types of options strategies:
1) Bullish Options Strategy: It's about buying call options when you expect that the price of the underlying asset will rise
2) Bearish Options Strategy: It's about buying put options when you expect that the price of the underlying asset will fall
3) Neutral Options Strategy: It's about buying both call and put options so that your profit potential is limited.
The neutral options strategy is a risk-averse strategy that consists of buying both call and put options. This strategy can be used to limit your profit potential to a predetermined amount, or limit the amount you lose if the underlying security doesn't move in the predicted direction. There are two types of neutral option strategies: Boundary and Credit Spreads.
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