5 options trading strategies for beginners
Dollar cost averaging What are some popular options strategies? Options offer many possibilities to respond to movements in the stock market. In this article, we discuss common options trading strategies. Do you prefer to read more about what options and how they work before learning about options trading strategies? Then read this article first.
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Options spreads Before getting into some of the different options strategies, we first introduce options spreads and three common classifications of them. The below types of options spreads are based on the positions used relative to each other on an options chain: These figures typically come from three distinct but interconnected reports that a publicly-traded company will additional earningsinternet to their investors in quarterly or annual reports; the balance sheet, the income statement and the cash flow statement.
A vertical spread involves using options with the same underlying asset and expiration date but different strike prices.
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A horizontal spread is created by using options with the same underlying asset and strike price but with different expiration dates.
It is also referred to as a calendar spread or a time spread.
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A diagonal spread is a combination of vertical and option strategies and examples spreads. This strategy is constructed using options with the same underlying asset but different strike prices and expiration dates. Options strategies classifications Aside from the spreads, options strategies can also be classified based on the expected market direction.
Based on the outlook, strategies are categorised as bullish, bearish, neutral or volatile: Bullish strategies are typically used when you expect the price of the underlying stock to increase.
If you were expecting a decrease in the underlying stock price, you may choose a bearish strategy.
Also known as non-directional strategies, you would generally use a diagonal spread when you expect that the underlying stock will not move in price or will move within a narrow range. You could choose to use a diagonal spread when you believe that the underlying stock will have a large price swing but you are not sure of the direction.
Examples of some common options strategies Below are explanations of some of the more common types of options strategies used by investors. We include examples of each so that you can get a better understanding of these concepts.
Note that the examples and results given are indicative and exclude transaction costs. Covered call With a covered call, you sell a call option while either already owning or purchasing the underlying stock. Covered calls are considered to be a neutral strategy as it is typically used when you do not believe that the online earning strategies option strategies and examples the underlying will move much in the near future.
The maximum profit with this strategy is the premium received from selling the call plus the difference between the strike price of the option and the purchase price of the underlying stocks.
The maximum potential loss is equal to the purchase price of the underlying, minus the premium received. Losses, in this case, are incurred if the prices fall below the break-even.
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They are offset by the premium received, but theoretically losses can be substantial if the price of the underlying falls. Bull call spread A bull call spread is a type of vertical spread strategy.
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As the name suggests, a bull call spread is used when you are bullish on the underlying. To exercise this strategy, you buy and sell an equal amount of call options with the same expiration date and underlying. The long call should have a lower strike price than the short call.
Both profits and losses are limited with this strategy. The potential profit is the difference between the two strike prices minus the net premium.
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The potential loss is the net premium. Losses are incurred if the price of the underlying ends below the break-even. Bear put spread Bear put spreads are also a type of vertical spread strategy that is typically used when you are anticipating a decrease in the price of the underlying asset. This strategy involves buying and selling an equal amount of puts with the same underlying and expiration date.
The put that is sold should have a lower strike price than the put purchased.