Investing your hard-earned money is an excellent way of maximizing profits. However, there are a lot of risks involved in it if you do not know what you are doing.
Jumping head-first and putting your money into buying and selling various assets is a recipe for disasters.
This is why every investor must dive deeper into the field of finance and learn option strategies and useful techniques to get good results.
This article will provide a guide for beginners to understand options trading and be good at it.
What are Options?
Options are a type of contract that provides the holder the freedom to buy or sell a security at a decided price at some point in the future. The decided price for that security is called the premium.
Option Strategies For Beginners
- Buying Long Calls
One of the most important things to keep in mind when you learn trading is to know or determine when the price of an asset will go up. Do your research, and if you are sure the price of a security will rise, you can purchase a call option with capital lower than the security itself.
This is highly beneficial as even if your prediction is wrong and the price falls, you will only pay the amount you paid as the premium.
This can be an excellent strategy for budding traders who are confident about their predictions.
One of the key factors to note here is that the risk is limited in a long call. Still, the profits can be unlimited as the option payoff will rise with time, and there is no limit to how high it can go.
- Buying Long Puts
The put option allows the option holder to sell an underlying asset at a decided price. This strategy can be beneficial for newcomers who want to learn to invest and are willing to take advantage of the falling prices. This works in the opposite manner of the call option. Here, the put option gains more value when the cost of the underlying asset drops.
Here, similar to buying long calls, the loss is only limited to the paid premium amount, however, the profit is not unlimited.
- Covered Calls
Unlike the two strategies mentioned above, the covered call strategy is based on an existing long position in the underlying security/asset. It is an upside call, sold at a price that covers the existing position size. Doing so helps the trader to earn the premium amount as income. However, it also caps the upside potential of the underlying position. This strategy is excellent for learners who want to earn the full premium for the option.
Conclusion: The Bottom Line
Checking the NSE charts and watching ads related to finance is not enough to ace the art of investing. You must go the extra mile to learn strategies that help you understand the risk involved in a trade and maximize profits. Options trading is a safe and profitable way of earning profits if you deploy the right strategies, like buying long calls, buying long puts, and going for covered calls.
These strategies have their own set of benefits and limitations, which is why you must carefully evaluate them before adding them to your option trading strategy arsenal.