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Options trading has gained massive popularity these days. In addition to growing one’s income, options limit the investor’s risk and help hedge against market volatility. The best thing about these instruments is that investors can trade them in anticipation of market movements, be it appreciation or depreciation. This factor provides both the option buyers and sellers with a fair chance to profit from them no matter how volatile the market is. If done right, trading options for income is a great way to grow your personal wealth.
However, options trading is highly complex and can be profitable only if the you are well aware of option trading strategies. It also involves significant risk and can lead to massive losses if done without proper knowledge.
If you are looking to trade options then read further to know what options are, the different option strategies, and how to trade them for income.
What are Options?
How You Can Start Successfully Trading Options for Income Right Now
An option is a type of derivative instrument that grants the holder of the instrument the right but not the obligation to buy or sell an underlying asset at a specified price at a future date, i.e., the date of expiration of the options. Their value depends on the underlying asset and usually expires and becomes worthless post that expiry date.
An options contract is divided into “call option” and “put option.” In the former case, the buyer of the options acquires the right to buy the underlying asset at a future point at a predetermined strike price or exercise price. In the latter case, the buyer acquires the right to sell the underlying asset at a predetermined strike price at a future date. Also, to execute the options contract, the buyer needs to pay a premium amount called the option premium to the seller and, after that, acquire that right.
Usually, options are exercised when the market moves in the direction that makes this right more valuable. If the market price is unfavorable for the option holders, they do not exercise their rights and let the option expire. So, for them, the potential losses do not exceed the option premium paid.
Trading Options For Income
The ones interested in trading them can buy them with brokerage investment accounts. Investors can perform trades over the counter transitions, or they can be exchange-traded in live and orderly markets in standardized contract formats.
Anyone who intends to start trading options should select an appropriate broker for options trading who offers a low per-contract fee. In most cases, online trading of options is performed, and a margin account is also required. Traders only need to apply for options trading and wait for approval. Once approved, they can enter orders for trading options in the same way as is done in the case of stock trading. The only difference is one needs to read the options chain to identify the underlying expiration date, strike price, and if it is a ‘call’ or a ‘put.’
Besides, selecting strategies is one of the biggest concerns, and traders should research for tools that can guide them with techniques they can apply along the way.
Basic Options Trading Strategies
Options trading strategies shape the entire trading results for which the traders must go for the right ones. Those starting with options trading can try out one or more of the strategies listed below to give their trading journey a good kickstart.
1. Long Calls
Long Calls is one of the most basic options trading strategies. It can be chosen if the trader believes the underlying asset’s price will rise. So, if anyone is bullish about a particular stock, exchange-traded fund (ETF), or index fund and wants to limit their risk, they can opt for this strategy. Besides, it can also be chosen if the trader wants to take advantage of the rising price level of the asset.
To execute it, the trader will only have to buy the option at a lower price than the asset’s price. If the asset’s price falls, losses will be limited to the extent of the premium paid for the options. However, the amount of profit is unlimited as the option’s payoff increases with the underlying price until expiry.
2. Long Put
A Long Put is another basic trading strategy. It gives the holder the right to sell the underlying asset at a specified strike price before the expiration. This strategy is used by traders who are bearish on a particular stock, ETF, or index and want to opt for lesser risk than short selling the asset. If anyone wants to take leverage of the falling price of the underlying asset, then the Long Put strategy might be appropriate for them in that situation.
This strategy is the opposite of the Long Call Strategy, and in this, the potential loss gets restricted to the amount of premium paid for the options. However, the maximum profit is capped as the underlying price cannot drop beyond zero.
3. Covered Call
Covered calls are overlaid onto existing long positions of underlying assets when an upside call that is sold covers the existing position size. In that process, the writer of the call collects the premium while limiting the upside potential of the underlying. Traders can go for covered calls when there is no change or a slight increase in the underlying asset price. The trader is willing to limit the upside potential for some downside protection in the form of a premium received when selling the call option.
4. Long Straddle
If a trader wants to capitalize on future volatility without taking a bet on whether there will be an upside or downside movement, he can opt for a Long Straddle. In this way, he will be able to profit in either case. To execute a long straddle, the trader needs to call and put options at the same strike price and expiration date on the same underlying asset. As it involves two at-the-money options, this strategy is comparatively more expensive.
There a several other strategies an option trader can undertake which are more complex. A good options trading alert service can be beneficial if you are looking for trade setups that use options strategy like an iron condor, credit spread, strangle, calendar spread, or anything related to selling options.
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