Options offer an opportunity to earn a great return that most other investments fall short in giving; and the risks are just as great. Option trading for beginners may be overwhelming. But like stocks or bond investments, it has its own jargon, rules and strategies that you can use to achieve your financial goals.
Options trading beginners:
A.)Defining option trading for beginners
An option is a contract that gives its holder the right to buy or sell the underlying securities. It’s not a stock certificate; neither does it indicate a direct beneficial ownership. It constitutes only a privilege to exercise the terms of the contract.
The exchange of option contracts is facilitated by the premium. It fluctuates according to many factors. It may be the length of time before it expires, the volatility of the price and the price movement of the underlying security in the market.
Aside from the premium, the option contract also specifies a strike price. This is the price the buyer and seller agree to buy or sell, if the contract is exercised. A contract also has an expiration date. An option can either be exercised on or before it expires or only during the day of expiration.
When the option is in-the-money, the strike price is lower than the actual value in the market. The reverse is called out-of-the-money. These usually dictate whether to exercise the contract, to trade it or to let it expire.
B.)Strategies in option trading for beginners:
1. Buying a Call
Buying a call option contract (or long call) means owning the right to buy a specific number of shares at a specific price within a specific period. This is a strategy used if you’re expecting an increase in the future price. Because you’re buying the shares low, the expectation of an increased price is an opportunity to exercise the right to buy it at a low price and sell it high in the market.
2. Buying a Put
Buying a put option contract (or long put) means owning the right to sell a specific number of shares at a specific price within a specific period. This is a strategy used if you’re expecting a decrease in the future price. Because you’re selling the shares short, the expectation of a decreased price is an opportunity to exercise the right to sell it at a high price and buy it back at a low price on the market.
3. Covered call writing
Covered call writing is a combination of having a long position in an underlying security and writing a call option contract against it. In this strategy, the seller already owns the security and writes a contract to sell it at a specific price. This is intended to protect a profit (in case of an expectation of a decrease in future price).
4. Protective put
Protective put is a combination of having a long position in an underlying security and owning a put option contract. In this strategy, the seller already owns the security and buys a contract to earn the right to sell it at a specific price. This is intended to protect a profit (in case of an expectation of a decrease in future price).
5. Cash-secured naked put writing
This is writing a contract that gives the buyer the right to sell a security you want to have at a specific price. The seller secures the contract with a ready cash in case the buyer decides to exercise it. This is intended to secure buying the security at a low price (in case of an expectation of an increase in future price).
An option is an investment vehicle that can take your capital to a profitable road. With all the trading strategies it offers and all the market forces it is exposed to, the dynamics provide a big window to get the most out of the market opportunities. All it takes is learning option trading for beginners to motivate anyone to jump on the option bandwagon.