Options Trading is the trading of financial instruments, which grant you the legal right to purchase or sell a certain underlying asset on a certain date at a certain price within a certain period. An option is an agreement that is linked directly to an underlying asset, i.e., a bond or a stock. It gives you the right but not the obligation to buy or sell at the determined price on or before the expiry date. In other words, an options trader makes money when he correctly identifies the right moment to buy or sell and he loses money when he incorrectly thinks that it is the wrong time to sell.
Options trading strategies have evolved over time and some of them are discussed in this article. It has been found that one of the best ways to make money from Options Trading through ‘puts’ and ‘calls’. These two basic options trading strategies have been in use for years now and they are very effective. Let’s see how these options work.
One of the most common options trading strategies is ‘puts’ and ‘calls’. In puts, an investor purchases an option with the strike price equal to the expiration date while in calls, an investor purchases an option with the strike price equal to or more than the expiration date. If the strike price is greater than or less than the expiration date, the investor will sell the option and gain the premium. If the strike price is less than or more than the expiration date, the investor will buy the option and lose the premium.
The other option trading strategy is ‘call’, which involves the purchase of securities with the strike price less than the option expiration date. If the stock market is volatile, the value of the stocks will fluctuate continuously. At times, the value of the stocks may go up and at times, it may go down. In this situation, when the investors decide to purchase the call, they will pay the premium as soon as the option expires. If the investor had purchased put at the same time, he would have paid the premium but since the call is not purchased, the stock will fall.
The underlying securities underlying the put and call options will be sold by the investor when the prices of the underlying securities go up and they will buy them when they go down. The underlying securities will be the stock, commodities, currencies and so on. Similarly, the underlying securities will also be sold by the investor when the prices of the underlying securities go up and they buy them when they go down. The underlying securities will be bonds, treasury bills, mutual funds and so on. It is important to understand that one should never invest more money than what one can afford to lose.
Another option trading strategy is ‘put’ and call spread. Here, the underlying securities will be sold in the form of a ‘basket’ of securities. The investor will make a series of trades and buys various securities at pre-decided prices and then sell the securities at the determined price. This is done so that the investor earns profits from the difference between the sale price and the predetermined price. Although this is a risky strategy, it is considered ideal for those who want to earn returns on the stock market in a short period of time.
