What are the best options trading strategies for a beginner …
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A well-built trading strategy could help big time when it comes to options – or any – trading.
Chris Douthit from Options Strategies Insider is here to share a detailed intro on options trading strategies extended by Kim Klaiman from Steady Options.
Options trading strategies
What are the best options trading strategies for a beginner trader to approach first?
Let’s see Chris Douthit’s take from Options Strategies Insider first.
When it comes to trading options, there are an endless number of strategies to consider. The key to being a successful trader is starting with a few strategies, learning how they work, then once you master one, moved to the next. Trying to learn too many strategies at once often leads to confusion, leading to losses within the portfolio.
The three strategies that are beginning options traders should start with are:
- Covered Call
- Shot Puts
- Vertical Spreads”
Options Trading Strategies: A Comprehensive Overview
Covered Calls
The covered call strategy involves selling call options against shares already held in an investor’s portfolio. By executing a covered call, the investor commits to selling their existing stock position should the share price exceed the predetermined strike price at expiration.
Consider this practical application: purchasing ABC stock at $100 and simultaneously selling a call option with a $110 strike price expiring in two months, collecting a $5.00 premium. In exchange for this premium, you assume the obligation to sell ABC at $110 should the stock trade above that threshold during the subsequent 60-day period.
This approach offers multiple advantages. First, the $5.00 premium creates a buffer—you won’t realize a loss on your stock position until it declines below $95. Should the stock appreciate to $108, you capture both the $8.00 equity gain and retain the $5.00 premium. Finally, if ABC reaches $120, you must sell at $110 but still retain the $5.00 premium, yielding a $15 total profit. While foregoing the call option would have generated greater returns in this specific scenario, such outcomes represent the least probable occurrence. Moreover, achieving a 15% return over two months constitutes exceptional performance by any measure.
Enhanced Covered Call Variations
Kim Klaiman from Steady Options expands upon traditional covered call explanations with his practical experience. Covered calls and protective puts rank among the most widely utilized options strategies. The protective put approach involves acquiring both shares and put options covering an equivalent number of shares.
His anchor strategy introduces two significant modifications. First, it utilizes Deep In The Money calls rather than direct stock purchases. Second, it sells short-term puts in specific proportions to finance longer-term put positions. These adaptations substantially reduce protection costs, occasionally achieving complimentary downside protection.
Short Puts
The short put strategy, examined thoroughly earlier, presents another compelling alternative to direct stock acquisition. Rather than purchasing shares, investors sell downside puts, immediately collecting premium regardless of subsequent market movements. Should the stock remain above the strike price, the premium is retained without ever establishing an equity position. If the stock falls below the strike price, the premium remains yours while acquiring the shares at the strike price—effectively purchasing at a discount to your original entry interest.
This approach embodies a win-win philosophy: either retain premium without stock ownership, or retain premium while acquiring shares at advantageous pricing.
Vertical Spreads
Chris Douthit from Options Trading Strategies discusses vertical spreads, which involve simultaneously purchasing one call (or put) while selling another call (or put) at a different strike price sharing the same expiration date. Investors favor vertical spreads for their dual benefits of reduced risk exposure and lower initial capital requirements, albeit with capped maximum returns.
This strategy proves particularly suitable for novice traders, enabling skill development without the substantial upfront costs associated with single-strike options purchases. Vertical spreads maintain attractive profit potential, explaining their adoption across both beginning and experienced traders. Consistent monthly implementation generates accumulating returns over time.
Conclusion
Options trading presents challenges for newcomers. However, those who master leveraging options advantageously—through thorough trade research, understanding implied volatility dynamics, and deploying appropriate strategies—can realize substantial rewards. Perhaps most valuable, properly learned options trading skills serve investors throughout their entire financial journey.
Options trading strategies
Where to look for more?
Where to look for more?
Hope you liked this quick rundown on what options are. If you’d like to go deeper, navigate to one of the articles below:
- What is options trading?
- Options trading examples
- The pricing of options
- Options trading for beginners
- How should a beginner options trader manage their risks?
- What are the benefits of writing an option?
- What is a binary option?