Did you ever wish to trade in underlying asset movements without actually owning the asset itself? Well, you can do so with the help of Options Trading. This is like having a contract that gives you the right but not the obligation to buy or sell an underlying asset at a certain price by a certain time.
Trading options can be both exciting and daunting for beginners. While options offer the potential for higher returns, they also come with increased risk. For those starting, focusing on safer strategies is crucial to manage risk effectively.
Top 5 safest option strategies for beginners
Here are five of the safest option trading strategies that beginners can consider:
Strategy 1: Covered Calls
Beginners find covered calls appealing because they offer an opportunity to earn extra income on assets that one already owns. This strategy involves holding a long position in an underlying asset and entails selling call options on the same asset.
By doing so, you collect the premium from the call option, which can provide a steady income stream. However, this is a limited profit strategy. This technique works best in relatively steady or slightly bullish markets where prices are predicted to remain almost unchanged or rise just a bit.
Strategy 2: Cash Secured Puts
Cash-secured puts are another strategy and refer to selling put options in return for a premium amount. If the option contract expires worthless, a trader gets to keep the premium.
However, if the market moves in the opposite direction, the losses can be unlimited. It is implemented when a trader has positive prospects for a given underlying asset. In this strategy, a trader keeps aside cash to honor the contract– that is why it is named cash secured puts.
Strategy 3: Long Call Options
Long call options are straightforward and involve buying call options with the expectation that the underlying asset price will rise. This strategy provides the right, but not the obligation, to purchase the underlying asset at the strike price before the option expires.
The potential profit is unlimited if the asset price increases significantly. The risk is limited to the premium paid for the call option. This strategy is suitable for beginners who have a bullish view of an underlying asset and want to leverage their position without risking more than their initial investment.
Strategy 4: Long Put Options
Long put options are similar to long call options but are used when you expect a decline in the asset price. By purchasing put options, you acquire the right, but not the obligation, to sell the underlying asset at the strike price before the option expires.
This strategy provides a way to profit from a falling market without short selling assets, which can be riskier. The maximum loss is restricted to the premium paid for the put option, while the potential profit increases as the asset price drops. This makes long put options an attractive choice for beginners looking to hedge their portfolios or capitalize on bearish market conditions.
Strategy 5: Protective Puts
Protective puts, also known as married puts, are a hedging strategy designed to protect against significant declines in the value of an underlying asset you own. This strategy involves buying put options for the same amount of assets you hold.
If the underlying asset’s price falls, the put option increases in value, offsetting the losses from owning the asset outright. This strategy provides a safety net, allowing you to hold onto your assets while limiting potential losses.
Conclusion
Option trading has many possibilities, more than just the basics of buying or selling underlying assets. In this article, we have discussed some of the simple and safest strategies for beginners. The key is to learn the basics first before diving into the derivatives market and have adequate risk management in place.