Options strategies: the best techniques for beginners
Discover the most common strategies for the options market and learn the best options trading techniques on Fineco's Newsroom.
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Options strategiesOption trading techniques that workTrading
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Best options trading strategies to use
To trade options, you must have a strategy. In this way, you can use these derivative instruments in an informed manner by carefully weighing up the risks and opportunities. Let’s look at what the best options trading strategies are, how to plan an effective strategy and the most suitable options for beginner traders.
How to create options trading strategies?
To create an options trading strategy, there are certain necessary requirements. Firstly, you must know technical analyses, in order to know how to use graphs and indicators to study asset price trends. Through technical analysis, you can discover the most interesting trends, avoid error and manage risk.
Fundamental analysis is also important for options trading. This skill allows you to understand macroeconomic factors in order to know which events can affect the price of options underliers, for example, bonds or indices. The most effective option is combining technical analysis with fundamental analysis to make more accurate predictions and minimise mistakes and false positives.
Also, you must practise to learn how to build an effective options trading strategy. Experience helps you learn how to use these financial instruments in the best possible way by protecting at-risk positions and making use of the market’s available opportunities. Following this introduction, let’s find out which options trading strategies work.
Options trading techniques that work
One effective strategy is the covered call, which is particularly useful for short-term transactions. In this case, you must buy the underlier and the call option at the same time, so that the short-term option is protected by the long-term investment. For example, if you have 10 shares of a stock, you also purchase a short call option and sell the option when the shares are purchased.
Another strategy that works is long calls. You use this when you think that the price of the underlier will increase; however, it also allows you to limit potential losses should the price decrease. This strategy involves buying numerous call option contracts, each of which represents a certain number of shares, for example 100 shares. If the price of the shares increases, the trader gets a much higher potential profit than if they had only purchased the 100 shares.
Married put is also a good strategy for options trading. You must buy a certain number of underliers and the same number of put options, as if you were purchasing an insurance policy on the underlier. If the asset increases in value, the loss is equal to the deposit paid on the put option, or if the price decreases, the options protect the underlying investment.
To protect investments, another interesting strategy is a protective collar. It works like this: you buy put options and call options at the same time, as well as the underlying activity. In this way, you protect the underlying investment, by protecting the position from both downtrends and uptrends; however, the trader could be forced to sell in case of an uptrend.
Low-risk option strategies
A low-risk binary options strategy aims to reduce losses as much as possible. In this case, the aim isn’t to make a huge profit but to protect at-risk positions or consolidate a gain without risking too much. They are usually used on low volatility underliers or to add extra protection to a long-term investment.
This is the case with long call spreads, a spread-based strategy with a fixed risk and limited profit. It involves purchasing a call option at a lower target price and selling a call option at a higher target price at the same time - both with the same expiry date. It is used with bullish trends. The maximum profit is determined by the difference between the spreads, whereas the maximum loss occurs if on the expiry date the price is lower than the lowest target price, creating a loss equal to the long call option’s premium.
This technique can also be used with put options based on a similar mechanism; however, in this case the risk is limited whereas the potential profit is fixed. A long-put call strategy involves buying a put option at a lower price and selling a put option at a higher price, both with the same expiry date. It is used with bullish trends following a bearish phase. The potential profit is equal to the option’s premium, whereas the maximum risk is equal to the premium amount for the long-put option added to the spread.
Of course, there isn’t one single strategy that works for all scenarios, but it is important to know the main strategies and learn when to use them. These techniques help you make the most of options trading opportunities or better protect your investments. However, to master them, you need experience, practice and studying.
Information or views expressed should not be taken as any kind of recommendation or forecast. All trading involves risks, losses can exceed deposits.
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