By Lucas Downey Updated May 29, Traders often jump into trading options with little understanding of the options strategies that are available to them. There are many options strategies that both limit risk and maximize return. With a little effort, traders can learn how to take advantage of the flexibility and power that stock options can provide.
How Options Trading Works You can deploy a range of options trading strategies, from a straightforward approach to intricate, complicated trades. But broadly speaking, trading call options is how you wager on rising prices while trading put options is a way to bet on falling prices. Options contracts give investors the right to buy or sell a minimum of shares of stock or other assets.
Options investing strategies not to exercise options means the only money an investor stands to lose is the premium paid for the contracts. As a result, options trading can be a relatively low-cost way to speculate on a whole range of asset classes.
By what date these price options investing strategies will occur. Alternatively, you can exercise the option to buy the underlying asset at the agreed-upon strike price.
Put options. Alternatively, you can exercise the option to sell the underlying asset at the agreed-upon strike price.
Options trading strategies can become very complicated when advanced traders pair two or more calls or puts with different strike prices or expiration dates.
Options Trading Pros Options trading combines specificity with flexibility. Traders need to choose a specific strike price and expiration date, which locks in the price they believe an asset is headed toward over a certain timeframe.
Because options contracts have an expiration date, which can range from a few days to several months, options trading strategies appeal to traders who want to limit their exposure to a given asset for a shorter period of time.
Options trading is also attractive as a hedging tool.
As a result, options trading can be a cost-efficient way to make a speculative bet with less risk while offering the potential for high returns and a more strategic approach to investing. There are essentially three decisions you must make with options trading direction, price and timewhich adds more complexity to the investing process than some people prefer. Securities and Exchange Commission SEC requires that brokers approve customer accounts for options trading only after you fill out an options trading agreement.
This is used to assess your understanding of options trading and its associated risks.