The option market is one of the most lucrative, and complicated, financial markets out there. This is especially true for those new to the world of trading. But with a little patience and research, it is possible to succeed in the options market and make money from it. Options are a contract between the option writer (in this case, you) and the option seller. The option seller agrees to sell the writer an amount of shares in a specific company, known as the underlying stock. These contracts give their holders the right to buy the underlying stock at a set price, known as the strike price, until a certain date, known as the expiration date. If the underlying stock rises above the strike price during the time the contract is in force, the option writer’s right to buy the stock immediately reverts back to the option seller. This is known as the call option. Conversely, if the stock falls below the strike price during the time the contract is in force, the option writer’s right to buy the stock reverts back to the option seller, which is known as the put option. This article will go over three ways to successfully trade options, based on your personal trading style, your capital availability, and the time you have to devote to the process.
1)Long call
In this strategy, the trader buys a call — referred to as “going long” a call — and expects the stock price to exceed the strike price by expiration. The upside on this trade is uncapped and traders can earn many times their initial investment if the stock soars.
2)Covered call
A covered call involves selling a call option (“going short”) but with a twist. Here the trader sells a call but also buys the stock underlying the option, 100 shares for each call sold. Owning the stock turns a potentially risky trade — the short call — into a relatively safe trade that can generate income. Traders expect the stock price to be below the strike price at expiration. If the stock finishes above the strike price, the owner must sell the stock to the call buyer at the strike price.
- Long put
In this strategy, the trader buys a put — referred to as “going long” a put — and expects the stock price to be below the strike price by expiration. The upside on this trade can be many multiples of the initial investment if the stock falls significantly.