Options are a type of derivative contract that provides the contract buyer, also known as the options holder, the choice to buy or sell a security at some point in the future at a chosen price. Option buyers pay a premium to the sellers for this right. If market prices are not favorable for the option holders, they simply let the option expire. This makes sure that the potential losses will not be more than the premium.
There are a few basic options trading strategies a new investor can utilize with puts or calls to limit the risk. Some options trading strategies use options to place a direction bet with a limited downside in case things do not go right with the bet. Others involve hedging strategies that are laid on top of positions that are already existing.
Options trading strategies may sound complicated or risky, especially to beginners. This can lead to many staying away and missing out on great opportunities for wealth growth. The fact of the matter is that options trading strategies are designed to help beginner investors protect downside and hedge market risk.
The top options trading strategies for beginners include long puts, long calls, protective puts, and covered calls. Additional strategies include married put, protective collar, long straddle, and long strangle.
Brokers assign various levels of options trading approval on the basis of the complexity and risk involved. Protective puts and covered calls are considered Level 1 if the investor owns the underlying asset already. Puts and long calls, as well as strangles and straddles are Level 2. Level 3 is options spreads, which involve the buying and selling of one or more different options of the same underlying at the same time. Unhedged options are Level 4. Contact Trade Genie today to learn more.