More often than not the traders who jump into the options game do so based on option trading tips. They havelittle or no knowledge about option strategies that can help them minimize their risks and maximize their returns. But unless they understand these strategies, they won’t be able to take full advantage of the power and flexibility associated with this incredible trading vehicle.
Here are a few option trading strategies that can shorten your learning curve and put you on the right track:
The Covered Call Strategy
This involves the outright purchase of the stock(in lots of 100 shares) and then selling or writing a call option on the entire stock or a part of it as per option trading tips. If the options contract is exercised, you can sell all the stock at the strike price and if not, you get to keep the stock. When sold, you get to make profits on both the stock as well as the options, provided the stock price is lower than the strike price. The covered call strategy would work well for you if you are an investor or a long-term trader. Also, you need to factor in the commission that you need to pay while trading a covered call.
The Married Put Strategy
The Married put strategy is more or less like buying insurance on your stock. Here you buy a certain stock and also a put option for the same as a protection against potential short-term losses. In case the stock price falls below the strike price before the option expires, you can exercise your put option and sell the stock at the strike price, thereby cutting down your losses. Nevertheless, you don’t have to exercise your put option if the stock price remains higher than the strike price. You can always make your profit by selling the stock when the stock price is at the highest.
The Bull Call Spread
This involves the purchase of call options as per option trading tips at a certain strike price and the simultaneous sale of the same at a strike price that is higher. However the underlying asset and the expiration month would be the same for both these call options. This would be a good vertical spread strategy to implement when you feel that the price of the underlying asset is going to rise moderately.
The Bear Put Spread
If you are a bearish trader, you would go for the bear put spread instead of the bull call spread. Based on your option trading tips, you will buy put options at a certain strike price and then sell them off at a strike price that is lower than the purchase price. It is ideal to use this strategy when the underlying asset price is expected to decline.
As a stock market expert, Share adviser can give you more information about option trading tips and strategies. However, it is important to understand when to use what strategy so as to make maximum profits out of your investment.
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