Options trading can be broken down into two categories. There are call options and put options. Call options let the holder buy an asset at a certain price within a certain timeframe. Put options let the holder sell an asset at a certain price within a certain timeframe. The experts at Schaeffer’s Investment Research recently discussed common strategies for options trading.
“A common options trading strategy is known as the ‘long call.’ This involves buying a call option and wagering that the stock will exceed the strike price before the expiration,” Schaeffer’s Investment Research experts said.
Another options trading strategy is known as the long put. This is similar to the long call and involves wagering that the stock decline below the strike price before expiration. The long put strategy is essentially the opposite of the long call strategy.
“The short put is an options trading strategy that involves wagering that the stock will rise or remain stagnant until the expiration time. The put will expire with no worth and the seller receives the entire premium,” Schaeffer’s Investment Research experts said.
The covered call is a more complicated options trading strategy. It is a two part process, which involves the investor owning the underlying stock then selling a call on that stock. The investor gives away any appreciation above the strike price in exchange for a superior payment. The point of this strategy is to wager that the stock will go down slightly until expiration or stay flat. Ideally, this strategy lets the seller keep the premium as well as the stock. However, if the stock increases above the strike price, the seller must sell the shares to the call buyer at the strike price.
“The married put is another complicated yet often beneficial options trading strategy,” Schaeffer’s Investment Research experts said. “It’s more than a basic options trading strategy, but it can also offer more reward.”
Experts state that the married put involves combining the long put strategy with ownership of the underlying stock and “marrying” them. The investor will buy one put for 100 shares of stock, and the investor will continue to own the stock with potential for appreciation. A simple comparison is between this strategy and purchasing insurance. The owner pays a premium for protection against a possible decline. An investor would use a married put if they’re hoping for continuing appreciation of the stock while protecting the gains they’ve already incurred.
The Schaeffer’s Investment Research team suggests consulting with a trading expert to learn more about options trading and if one or more of these strategies can work well for you.