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Options trading has grown in popularity to become one of the most common trading methods. This method of trading has the potential of generating higher profits for investors which is why people look to options trading for a monthly income.
If you are a novice or a beginner options trader, it is important that you understand your investing style and make the correct trading decisions early on to ensure higher profits and lower losses. This is why you should understand and know about the best options strategy for beginners before you take the plunge into options trading. Here are the ten best options strategies for beginners.
10 Best Option Trading Strategies for Beginners in 2023
Top 10 Best Option Trading Strategies for Beginners in 2023
Long Call strategy
This is a basic strategy but a good one for traders who are confident in certain stocks and want to reduce risk. In this strategy, the trader buys a Call option and later sells it when the price of the asset moves up. This strategy has the potential for unlimited profits and the potential for a loss here is limited only to the premium that is paid at the beginning of the trade. In this strategy, traders buy a Call option and close it at a later date or at the option’s expiration.
Long Put Strategy
This is another basic strategy. This is the opposite of a Long Call strategy. The trader is bearish on an asset and buys Put options in the belief that the price of the asset will go below the strike price before the expiration. The potential for profit in this strategy is limitless while the loss is limited to the premium paid for the Put option. If the asset price doesn’t fall below the strike price before the expiration date, the Put option is worthless. This is similar to a short-selling strategy with one significant exception: The trader does not have to borrow the stock to short it.
Covered Call Strategy
This strategy is good for traders who know their assets have limited upside potential. The Covered Call is a good strategy for traders who are bullish about their assets for the short term. In this strategy, the trader sells a Call option contract of an asset they know. This locks in the price of the asset enabling them to enjoy the limited profit. If the price doesn’t change, the profit is the premium that was paid to the trader when they sold the Call option. If the price of the asset falls, the loss is reduced thanks to the premium received.
Protective Put Strategy
This strategy works perfectly for traders who own an underlying asset and want downside protection. This strategy is common among traders who want to hold an asset for a long time but the current situation makes them bearish on the asset. This strategy limits losses that might occur when an asset price suddenly drops. The trader purchases a Put option. Any loss that occurs due to the fall of the asset price below the strike price is compensated by profits in the options trade.
Married Put Strategy
This strategy is like an insurance policy against short-term losses Call options that include a specific strike price. After the trader purchases an asset, they can buy Put options for an equal number of shares. They can also sell the same number of Call options at a higher strike price for profit. This strategy works best when an asset price significantly rises before the option’s expiration. The upside of this strategy is uncapped for as long as the stock continues to rise. The downside is the loss of the price of the premium. It is also called Covered Put.
Short Put Strategy
This strategy is used when the trader expects a moderate increase in the asset price. The trader has an obligation to buy the asset at a fixed price in the future if the buyer of the option exercises the option. This means the trader is at risk of a high loss if the asset price falls below the strike price when the option expires.
Protective Collar Strategy
This strategy is used by people during high volatility. The Protective Collar strategy provides traders downside protection in the short term. This strategy comes into play when the trader is long on the asset. They write a Put option to protect themselves against short-term downside. They write a Call option on the asset to finance the Put purchase. The strike price of the Call is generally higher than the strike price of the Put.
Long Straddle Strategy
In this strategy, traders buy a Call option and a Put option at the same time. Both options have the same strike price and expiration date. This allows traders to profit from a strong move by the underlying asset. This move is often triggered by a big event that affects the market. However, the risk of this strategy is that the market may not behave in an expected way causing you a loss.
Long Strangle Strategy
In this strategy, the trader buys one long Call at a high strike price and one long put at a lower strike price. However, both options have the same expiration date. This strategy has the potential to let you have a high profit as the upside is theoretically unlimited. The potential loss is limited to the premium that must be paid for two options.
Bull Call Spread Strategy
This strategy is designed to allow the trader to make a profit from an asset’s limited increase in price. It includes the use of two call options that creates a range consisting of low strike prices and upper strike prices. It also limits the losses of owning stocks while capitalizing on the gains.
These are some of the best strategies for beginners that many investors use while trading options. Although there are some risks that arise while trading, having a strategy that suits you best, will help you make the highest profits possible while trading. Therefore, as a novice or a beginner, you must ensure that you use the best strategy to aid you in your investment decisions.
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