10 Wonderful Option Trading Strategies For Beginners

Wonderful Option Trading Strategies For Beginners Image of dice to show the concept of option trading.

Options are wonderful derivatives that provide enough leverage for trading. Investors can gain larger profits with smaller risk. You just need to adopt some basic option trading strategies for beginners while trading.

According to Investopedia, an option is a contract that gives the buyer the right, but not obligation, to buy or sell an underlying asset at a specific price on or before a certain date.

Like stocks, options also involve risks & are not suitable for every trader. Option trading is found to be highly speculative in nature. It carries the risk of losing partial or even entire premium paid by you.

You should invest only the partial amount of your total investments in options. However, one of the biggest advantages of option trading is that you can easily hedge your portfolio with them.

Hedging with options can limit your potential downside risk. Here are 10 best, simple & easy to understand call & put option trading strategies for new traders with examples:

(1) Covered Call Strategy

It is one of the most common & basic option trading strategies for beginners. It involves selling (or writing) call options against shares of stocks you already own. However, your volume of assets owned should be equivalent to the number of assets that are underlying in a call option.

This conservative strategy is good for investors with short-term position & neutral opinion. It is a great way to generate additional profits in form of premiums.

For example, you have purchased 100 stocks of company A at a price of $100. Suppose the call option contract size for company A is 100.

In covered call strategy, you have to sell 1 lot of call of strike price $105 at a price of say of $3 per share. So, for 100 shares it will be $3 x 100 = $300. You can also adopt this strategy to protect against a small decline in the underlying assets.

S. No. Closing Price Of Stock Profit From Stocks Held In Cash (X) = No. Of Shares[(Selling Price Of Every Stock – Purchase Price Of Every Stock)]

(Purchase Price $100)

Profit From Sell Call (Y) = Contract Size [(Initial Premium Collected Per Share) – (Cost Of Per Share In Call On Expiry)]

(Call Strike Price $105)

Total Profit From Strategy

(X + Y)

(1) $80 100[$80 – $100] = -$2000 (Loss) 100[$3 – $0] = $300 -$2000 + $300 = -$800 (Loss)
(2) $90 100[$90 – $100] = -$1000 (Loss) 100[$3 – $0] = $300 -$1000 + $200 = -$800 (Loss)
(3) $95 100[$95 – $100] = -$500 (Loss) 100[$3 – $0] = $300 -$500 – $300 = -$800 (Loss)
(4) $105 100[$105 – $100] = $500 100[$3 – $0] = $300 $500 – $300 = $200
(5) $110 100[$110 – $100] = $1000 100[$3 – $5] = -$200 (Loss) $1000 – $300 = $700
(6) $120 100[$120 – $100] = $2000 100[$3 – $15] = -$1200 (Loss) $2000 – $300 = -$1700

Note: For Simplification we have considered brokerage & security transaction tax as Zero.

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