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    Options Trading Strategies: A Guide For Beginners: Elvin Mirzayev

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    Jonhmark Aniñon
    This document provides an overview of basic options trading strategies for beginners. It defines options and describes call and put options. It then explains several strategies including buying calls to profit from rising prices, buying puts to profit from falling prices, covered calls to limit downside risk, and protective puts to hedge existing stock positions. The strategies are compared in terms of their risk and reward profiles.

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    Options Trading Strategies: A Guide For Beginners: Elvin Mirzayev

    Uploaded by

    Jonhmark Aniñon
    82 views4 pages
    This document provides an overview of basic options trading strategies for beginners. It defines options and describes call and put options. It then explains several strategies including buying calls to profit from rising prices, buying puts to profit from falling prices, covered calls to limit downside risk, and protective puts to hedge existing stock positions. The strategies are compared in terms of their risk and reward profiles.

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    This document provides an overview of basic options trading strategies for beginners. It defines options and describes call and put options. It then explains several strategies including buying calls to profit from rising prices, buying puts to profit from falling prices, covered calls to limit downside risk, and protective puts to hedge existing stock positions. The strategies are compared in terms of their risk and reward profiles.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    82 views4 pages

    Options Trading Strategies: A Guide For Beginners: Elvin Mirzayev

    Uploaded by

    Jonhmark Aniñon
    This document provides an overview of basic options trading strategies for beginners. It defines options and describes call and put options. It then explains several strategies including buying calls to profit from rising prices, buying puts to profit from falling prices, covered calls to limit downside risk, and protective puts to hedge existing stock positions. The strategies are compared in terms of their risk and reward profiles.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    Options Trading Strategies: A Guide for

    Beginners
     FACEBOOK

     TWITTER

     LINKEDIN

    By 
    ELVIN MIRZAYEV
     
     
    Reviewed by 
    JULIUS MANSA

     
     
    Updated Jun 1, 2021
    TABLE OF CONTENTS

     Trading Options vs. Direct Asset


     Buying Calls (Long Call)
     Buying Puts (Long Put)
     Covered Call
     Protective Put
     Other Options Strategies
     The Bottom Line

    Options are conditional derivative contracts that allow buyers of the contracts


    (option holders) to buy or sell a security at a chosen price. Option buyers are
    charged an amount called a "premium" by the sellers for such a right. Should
    market prices be unfavorable for option holders, they will let the option expire
    worthless, thus ensuring the losses are not higher than the premium. In contrast,
    option sellers (option writers) assume greater risk than the option buyers, which
    is why they demand this premium.

    Options are divided into "call" and "put" options. With a call option, the buyer of
    the contract purchases the right to buy the underlying asset in the future at a
    predetermined price, called exercise price or strike price. With a put option, the
    buyer acquires the right to sell the underlying asset in the future at the
    predetermined price. 

    Why Trade Options Rather Than a Direct Asset?


    There are some advantages to trading options. The Chicago Board of Options
    Exchange (CBOE) is the largest such exchange in the world, offering options on
    a wide variety of single stocks, ETFs and indexes.1  Traders can construct option
    strategies ranging from buying or selling a single option to very complex ones
    that involve multiple simultaneous option positions.

    The following are basic option strategies for beginners. 

    Buying Calls (Long Call)


    This is the preferred strategy for traders who:

     Are "bullish" or confident on a particular stock, ETF or index and want to


    limit risk
     Want to utilize leverage to take advantage of rising prices

    Options are leveraged instruments, i.e., they allow traders to amplify the benefit
    by risking smaller amounts than would otherwise be required if trading the
    underlying asset itself. A standard option contract on a stock controls 100 shares
    of the underlying security.

    Suppose a trader wants to invest $5,000 in Apple (AAPL), trading around $165


    per share. With this amount, they can purchase 30 shares for $4,950. Suppose
    then that the price of the stock increases by 10% to $181.50 over the next month.
    Ignoring any brokerage, commission or transaction fees, the trader’s portfolio will
    rise to $5,445, leaving the trader with a net dollar return of $495, or 10% on the
    capital invested.

    Now, let's say a call option on the stock with a strike price of $165 that expires
    about a month from now costs $5.50 per share or $550 per contract. Given the
    trader's available investment budget, they can buy nine options for a cost of
    $4,950. Because the option contract controls 100 shares, the trader is effectively
    making a deal on 900 shares. If the stock price increases 10% to $181.50 at
    expiration, the option will expire in the money and be worth $16.50 per share
    ($181.50-$165 strike), or $14,850 on 900 shares. That's a net dollar return of
    $9,990, or 200% on the capital invested, a much larger return compared to
    trading the underlying asset directly. (For related reading, see "Should an
    Investor Hold or Exercise an Option?")

    Risk/Reward: The trader's potential loss from a long call is limited to the


    premium paid. Potential profit is unlimited, as the option payoff will increase
    along with the underlying asset price until expiration, and there is theoretically no
    limit to how high it can go. 

    Image by Julie Bang © Investopedia 2019


    Buying Puts (Long Put)
    This is the preferred strategy for traders who:

     Are bearish on a particular stock, ETF or index, but want to take on less
    risk than with a short-selling strategy
     Want to utilize leverage to take advantage of falling prices

    A put option works the exact opposite way a call option does, with the put option
    gaining value as the price of the underlying decreases. While short-selling also
    allows a trader to profit from falling prices, the risk with a short position is
    unlimited, as there is theoretically no limit on how high a price can rise. With a
    put option, if the underlying rises past the option's strike price, the option will
    simply expire worthlessly. 

    Risk/Reward: Potential loss is limited to the premium paid for the options. The
    maximum profit from the position is capped since the underlying price cannot
    drop below zero, but as with a long call option, the put option leverages
    the trader's return.

    Image by Julie Bang © Investopedia 2019


    Covered Call
    This is the preferred position for traders who:

     Expect no change or a slight increase in the underlying's price


     Are willing to limit upside potential in exchange for some downside
    protection
    A covered call strategy involves buying 100 shares of the underlying asset and
    selling a call option against those shares. When the trader sells the call, the
    option's premium is collected, thus lowering the cost basis on the shares and
    providing some downside protection. In return, by selling the option, the trader is
    agreeing to sell shares of the underlying at the option's strike price, thereby
    capping the trader's upside potential. 

    Suppose a trader buys 1,000 shares of BP (BP) at $44 per share and


    simultaneously writes 10 call options (one contract for every 100 shares) with a
    strike price of $46 expiring in one month, at a cost of $0.25 per share, or $25 per
    contract and $250 total for the 10 contracts. The $0.25 premium reduces the cost
    basis on the shares to $43.75, so any drop in the underlying down to this point
    will be offset by the premium received from the option position, thus offering
    limited downside protection.

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