Introduction to Options Trading Strategies
Options trading allows us to buy or sell stocks, ETFs and other securities at a set price on a certain date. This method of trading also offers buyers the option of not buying the securities at the price indicated or on the date indicated.
Options are a bit more complicated than stock trading, but they can help generate more gains. When you buy an option, you have the option but not the obligation to trade the underlying asset.
A call option gives you the right to buy underlying securities at a specific price within a specified time. A put option, rather than giving you the choice of buying an underlying asset, gives you the option of trading it at a certain price. When you buy a call, you buy a contract to acquire a specific stock or asset on a specific date, similarly, when you buy a pet, you buy a contract that gives you the opportunity to sell securities at a price specific by specific expiration date.
Options trading strategies are generally classified into three broad categories
Bullish strategies including Buy Call, Sell Put, Bull Call Put and Bull Put Spread will be explained in this blog and Bearish including Buy Put, Sell Call, Bear Call Spread, Bear Put Spread and Put Ratio Back Spread and two other categories in the other blog of the series.
Bullish Options Trading Strategies
Buy a call
A simple trading options strategy in which you receive the option premium in exchange for the right to buy shares at a particular price on or before a specific date when you buy a call. When an investor is bullish on a stock or any other investment, they frequently buy calls because it gives them leverage. Buying call options and then trading them for a return can be a great strategy for increasing your portfolio’s performance.
Another simple options trading strategy is to promise to buy an asset at an agreed amount. When the price of the underlying asset falls, put options increase in value, the price volatility of the underlying securities increases and interest rates fall. Movements in the value of the underlying security, the strike price of the option, decay over time, interest rates and volatility all affect the price of put options.
Spread of bullish calls
Generally, spreads are multi-leg techniques in which two or more options are traded. The strategy is to use two call options to generate a strike price range with a lower and higher strike price. A long call with a lower price and a shorter call with a higher price constitute a bullish call spread. When a trader is betting that the price of a stock will rise only a little, he is using this options strategy. Additionally, the bullish buy spread could help prevent stock losses while limiting gains.
Bull Put Spread
As the name suggests, the bull put spread is created by using “put options” rather than “call options” to create a spread. This makes it similar to the Bull Call Spread somewhat similar to the Bull Call Spread. An investor performs a bullish put spread by acquiring a put option on a security and buying additional put options on around the same date, but at a higher strike price. The disparity between the strike prices and the net credit obtained is the maximum loss, similarly, the difference between the premium costs of the two put options is the maximum profit.
You can check further for Bearish including Buy Put, Sell Call, Bear Call Spread in post option trading strategies.
To learn more about the stock market, you can check out the price structure of our next Lakshya batch which will start in the month of March 2022.