Getting started in the world of options trading involves three unavoidable steps: Money management, research, and strategy. Each of these steps presents various levels of complexity, but they can all be approached by beginners in a manner that is easy to assimilate.
Money management is a collection of practices that boils down to responsibly investing only what you could afford to lose without going broke. Research involves getting to know the mechanics of trading as well as learning about the underlying assets that you will be placing options orders on; in this case, we will be reviewing equity securities, which are more commonly known as stocks.
The stock options trading strategy you apply will determine the position you will take on the market and the parameters of the trade itself.
Table of Contents
Understanding Stock Options
Before we get into reviewing the stock options trading strategy that is right for you as a beginner, it is important to understand that you will be working with derivatives and not directly with shares of companies that trade on Wall Street. This means that you will not have “skin in the game;” instead, you will be trading a financial contract that gives you the right to either purchase.
This does not mean you are obligated to execute the contract, which could result in you actually holding stock, but you will have the opportunity to profit from the transaction.
With the above in mind, let’s review three options trading strategies that are suitable for beginners:
The Long Call
Everyone gets the meaning of “buy low, sell high.” This Wall Street axiom of investing is also referred to as “going long,” and with regard to options trading, it means that you expect the price of a stock will increase. If you think, for example, that Microsoft shares will hit a strike price of $290 within a month because they are trading at $283 today, a long call would be the right stock options trading strategy for you.
As previously mentioned, you will not have an obligation to purchase Microsoft shares when you exercise the option, but you will be able to cash in on the higher value of the contract itself. Long calls have been popular among options traders in recent years because we have been experiencing a bullish market.
The Long Put
To a certain extent, this strategy is the opposite of going long because you are actually shorting a stock, which means that you believe the price of the underlying asset will decrease at some point in the future. Perhaps your research suggests that MSFT shares will dip below $280 over the next couple of months as the market cools down; in this case, the premium of your options contract will appreciate if your long put was accurate.
According to the experts at SoFi, an all-in-one app for investing, long puts can also be used as hedging strategies, but this is not something that newbie traders would explore until they find their footing in the market.
Becoming Familiar With Long Calls and Long Puts
One of the advantages of options trading is that you can always find opportunities to profit despite the direction the market is taking. Getting your feet wet with long calls and long puts is a good way to start; be sure to try out a couple of paper trades with realistic money management before you get into live options contracts.
Sudarsan Chakraborty is a professional Blogger and blog writer. He lives and breathes in the blogging industry. He regularly writes on Widetopics to keep all the readers updated with the latest facts on wide range of topics.