A Complete Guide for Beginners in Options Trading

Options Trading

Options Trading

What Are Options?

Equity-listed options are a written agreement between a consumer and a seller. They note that the buyer will have the right but is not bound to buy or sell an investment at a predetermined cost before the expiration of the agreement. Option buyers have the privilege to buy percentages of stock with a covered call option and the freedom to sell shares of stock with a put option. Each option has a preconceived strike price and expiration date.

Option sellers gather compensation from the buyer in trade for the commitment to buy or sell the stock. The option seller keeps the bonus, whether the option is exerted or expires, useless to the buyer. Pretty straight, right?

What is Options Trading?

With calls and puts purchasing and selling, options trading can quickly sound overwhelming. It will become even more difficult after merging multiple options. While it can seem complex in the beginning, you will soon begin to comprehend that trading with options is not just easy but can fetch a decent profit.

In this article, we will concentrate on the basics and what’s suitable for option trading freshers.

Types Of Options Trading

Now, let’s start by understanding the two types of options trading:

  • The European Option can only be wielded when you reach the expiry date. Equity indices use this sort of option.
  • The American Option can be exercised at any moment as long as it drops before the expiry date. This comprises exchange-traded accounts and stocks.

Neither of these has anything to do with the parts of the country you trade from.

Options Trading Terminologies

Moving on, let’s catch you up on some option trading terms that will be required when you start trading in options.

  • The Premium is an expense that will be paid to the seller by the customer of a specific option.
  • The Strike Price is the amount at which an options agreement can be traded or purchased when exercised.
  • The Expiry Date is a pre-conceived date and the last day on which an option holder can exercise their privilege to purchase or sell the asset or security in question.
  • The Stock Symbol is utilized to identify the investment that has been employed in the options agreement.

You can refer to a reliable high premium options screener and learn more about the options you intend on trading.

Call Options in Depth

If you do not want to purchase a stock, you can choose to buy a call option. Holding a call will provide you the privilege to buy the remaining asset on a predetermined date at the strike price. The price of the call will be smaller than buying claims, and you will have to take part in any potential upside. That said, you’re under no burden to make a purchase.

When you’re operating with a covered call option, the possible loss limits down to just the paid premium. The upside possibility, on the other hand, is unlimited. Here’s an illustration for helping you understand the difference between a call and a put option.

For example, a call option grants you the right to buy 100 shares of company X. Let’s say company X is trading at $220 on the expiration date, the option’s strike price is $200, and they cost you $4 per share, then the profit will be {$220 – ($200 +$4)} = $16. So, if you bought one options contract, your gain will be equal to $1600 (i.e., $16 x 100 shares); the profit would be $3200 if you purchased two options contracts (i.e., $16 x 200).

Now, if at expiry, company X is trading at less than $200, obviously you won’t exercise the right to buy the shares at $200 apiece, and the option will expire, worthless. Worst case scenario, you’ll lose $4 per share, or $400 in total, for each contract you bought.

Put Options in Depth

If you were to buy a put option, you would get the freedom to trade the underlying asset at the strike price. The distinction between call and put options is that the put option is mainly used to protect your long position if and when the price falls. Also, a put option can be utilized whether or not you hold any underlying assets.

For a put option, the maximum loss on the option is limited to the premium paid for the put. But the maximum gain on the option would only be possible if the underlying stock price depreciated to zero.

Calls and Puts as Tools

Call and put options are valuable tools that can rescue you from downside risks and improve the possibilities of earning a more heightened profit. That said, if newbies are not cautious, things could go in reverse. Therefore, you should only begin exercising call and put options after learning how options trading functions extensively.

As of now, you can use a covered call option screener for trading in safe options. However, leverage and speculation are the most typical cause to buy options. Selling options are also a prominent way to lower risk and boost revenue from a holding. Thankfully, the internet has tools developed especially to help investors screen for covered options.

Difference Between Call and Put Option

One of the most notable differences between calls and puts is that they are affected differently by the joint influences on option trading prices.

1. Strike Price

The value of an option will alter drastically with a change in the strike price. In the case of calls, the lesser the strike, the higher their worth. But as the strike grows, the value of call options drops. This is where we see a difference between call and put. Puts that have a lesser strike are appreciated less than puts that have a higher strike.

2. Underlying Price

Delta is used to decide how differences in the underlying securities’ cost will affect the option’s price. Delta for calls is positive, meaning their value boosts as the stock price boost. And since puts have a negative delta, their value drops when there’s a positive change in the underlying asset’s cost.

3. Dividends

If a stock’s ex-dividend is before an options expiration, it will influence the price of both the calls and puts, but separately. Upcoming dividend earnings reduce call prices but improve put values.

Options Trading Strategies

The way to being a splendid options trader is by getting your basics right. There are a lot of methods out there that can help you in trading. Let’s take a peek at some of the most widely-used approaches leveraged by options traders out there:

● Married Puts

To execute the married puts method, one needs to buy an asset and then buy a put option for the exact number of shares of the same asset. When you do this, you get the freedom to sell off the stock at the strike price while providing you with downside security. The main reason for using a married put method will be to protect yourself in case the stock price was to drop. Although there’s an infinite potential to gain returns, it will cover your losses if the stock price falls below the put option’s strike price.

● Covered Calls

A beautiful thing about the covered calls method is that it has two parts: one where you buy an underlying asset, and another where you sell a covered call option for the same investment you just purchased. You can earn a return by trading call options as long as the cost of the stock does not go past the strike price.

● Long Straddle

If you were to buy a long call and long put option for the stocks of the same investment, at the exact same time, strike price, and expiration date, then you’d be utilizing the long straddle method. Your objective with this approach will be to earn a profit when a stock creates a strong move up or down in the market. In most circumstances, the long straddle is used when a newsworthy circumstance happens.

Last Words

Now, before we leave you to trade in stocks for yourself, here are some things you should keep in mind:

  • When trading in options, begin your search with a reliable options premium screener. You must take an estimated risk by taking into concern the diverse possibilities and statistics of the market. Make sure you’re also taking into account the nature and volatility of the market, documented and implied.
  • You’re going to be trading on various underlying securities, for example, indexes, equities, or ETFs. So, it’s easy to get swamped with the idea of options trading, but once you comprehend the basics, things become easier.

To start with, understand that an option is an agreement that provides the buyer the right to buy or sell the underlying asset at a decided price on or before the cancellation date. The buyer has no obligation to do so. The customer can also buy the underlying asset of a covered call option or sell the asset when holding a put option. This is the main difference between call and put options.

About Adrian Collins 1 Article
Adrian Collins works as an Outreach Manager at optionDash. optionDash is always looking forward to offering the best covered call and cash secured put screener on the internet. Adrian is passionate about spreading knowledge on stock and options trading for the rising investors.

Be the first to comment

Leave a Reply

Your email address will not be published.