Options are one of the most widely used trading instruments because their price may change quickly. And allowing for swift gains (or losses) in the capital. Options methods come in various payoffs, with names that are occasionally strange and can be pretty simple or quite complicated.
No matter how complex they are, call-and-put options are the foundation of all ” options trading “. Here are some examples of the most popular options trading strategies to help you understand them better.
Long Call:
By “going long” a call, the trader purchases a call in this method with the expectation that the stock price would rise over the strike price by expiry. The potential profit from this transaction is limitless. And investors might make several times their initial investment if the stock climbs.
Example:
Shares of Stock X are currently trading at $20 per, and a call with a $20 strike price and a 4 months expiration is currently trading at $1. One contract costs $1, each representing 100 shares, for a total cost of $100.
Covered Call:
Selling a call option is known as “going short” in a covered call. In this case, the investor trades a call and purchases 100 shares of the stock that underlies the option. The short-call trade is made into a relatively secure, potentially lucrative investment by owning the stock. Traders anticipate that the stock price will be lower than the strike price at expiration. The owner should sell the shares to the call buyer at the strike price. If the price closes just above the strike price.
Example:
Shares of Stock X are currently trading at $20 per, and a call with a $20 strike price and a four-month expiration is currently trading at $1. One contract * $1 * 100 shares covered each contract, or $100, is paid as the premium. The trader spends $2,000 to purchase 100 shares of stock and then earns $100 by selling one call.
Long Put:
In this approach, the trader purchases a put, often known as a “going long” put, with the expectation that the stock price would be lower at expiration than the strike price. If the stock declines dramatically, the potential profit on this transaction could be many times the initial investment.
Example:
Shares of Stock X are currently trading at $20 each, and a put with a $20 strike price and a four-month expiration is currently trading for $1. One contract costs $1, each representing 100 shares, for a total cost of $100.
Short Put:
In this technique, which is the opposite of the long put, the trader offers a put (also known as “going short” a put) and anticipates that the stock price will be higher than the strike price by expiry. The highest a short put can earn is a cash premium, which the trader gets in return for selling it. At Options Trading Strategies, if the stock falls below the market price, the trader is required to purchase it at that price.
Example:
A put with a $20 strike price and a four-month expiration time is trading for $1 on Stock X, now trading for $20 a share. One contract * $1 * 100 shares are represent in each contract, which equals a premium payment of $100.
Married Put:
With a variation, this tactic is similar to the long put. The trader purchases both a put and the underlying shares. This is a balanced trade wherein the trader anticipates that the stock will increase but wants “insurance” in case the stock declines. If the stock does decline, the long put cancels out the loss.
Example:
As an illustration, Stock X is trading at $20 per share, while a put with a $20 strike price and a four-month expiration is trading for $1. The trader spends $2,000 to purchase 100 shares of stock and one put, each costing $100. The contract price is $100, or one contract * $1 * the 100 shares it represents.
Conclusion
While options are typically considered high risk, brokers can use several Options Trading Strategies with a lower risk. So even traders who are afraid of taking risks can increase their overall earnings by using options. However, it’s crucial to comprehend the risks associated with any transaction so that you can decide whether the possible reward justifies them. Get Together Finance (GTF); Institute is among Jaipur’s best stock market tutoring. It will teach you how to trade shares and generate a healthy profit.
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