The beauty and greatest advantage of the digital age are that almost everything can be done online. As long as an investor has a trading account with a broker, they can begin trading. Online brokerages allow investors to direct trades on their own, through a computer or phone.
There are two types of options trades i.e. calls and puts. These two can be bought in different ways. Let’s take a closer look at each.
Buying Puts (Long Puts)
Puts are options that give the holders the right to sell a particular number of assets at a predetermined price (strike price) within a specific timeframe (i.e. before the option contract expires). To buy the contract, the holder must first pay a premium to open an options trading position. Put options are used by investors who speculate on downward price movements of underlying assets.
Buying a put option contract gives the holder the right to sell a specific number of securities at a predetermined price and within the set timeframe.
There are some things an investor must consider before buying a put;
- The amount of money to invest
- The timeframe of the investment
- What kind of changes in market prices are expected.
Because put options involve selling underlying assets, it makes sense that investors typically expect prices to drop before the contract expires. If that speculation is accurate then prices drop and the investor earns the difference between the asset’s price and the strike price.
Profit or Loss = Strike Price – Asset Price – Premium
Buying Call (Long Calls)
Calls are options that give the holders the right to buy a particular number of assets at a predetermined price (strike price) within a specific timeframe (i.e. before the option contract expires). To buy the contract, the holder must first pay a premium to open an options trading position. Put options are used by investors who speculate on upward price movements of underlying assets.
Buying a call option contract gives the holder the right to buy a specific number of securities at a predetermined price and within the set timeframe.
Investors buying call options should make the same considerations as investors buying put options.
Puts involve buying underlying assets and therefore investors should consider buying a call option contract if they think market prices will go up. If that speculation is accurate and prices do go up, the investor will earn the difference between the asset’s price and the strike price.
Profit and Loss = Asset Price – Strike Price – Premium
Other Strategies For Trading Options
All forms of trading require some kind of strategy. Options aren’t any different. Now that we have looked at the fundamentals of options trading and understood the different types of options, we can look at the different strategies that investors can use to trade listed options.
The most basic concept of trading options is deciding whether to buy put or call options. Deciding which of the two is dependent on the speculations made.
Investors can begin looking into more advanced options trading strategies as they get more comfortable. Here are some of the techniques.
- Covered Calls
This options trading strategy has two main parts;
- The investor buys an underlying security
- The investor then sells the call options for the same security
In this case, the investor owns the asset and will therefore act as the writer in the contract. As long as the value of the asset doesn’t rise above the strike price, the investor can reap profits.
- Married Puts
This strategy involves investors purchasing assets and then buying a put option contract for the same number of shares. This is a hedging strategy that will protect the investor in case prices move downwards because they will get their assets at the stipulated strike price.
- Long Straddle
This is a strategy that involves an investor buying call and put options contract for the same asset. This strategy is used by investors who are unsure how prices will move. Therefore this is a way to protect assets in both directions.
Options trading is unique and has many useful benefits. Other than simply buying calls and puts, there are other strategies that investors may use to trade. It takes time, practice, and patience for investors to fully grasp the market and how to trade but it is worth the effort in the long run.