Options trading can quickly become overwhelming and confusing. Many traders jumped in with little knowledge of the strategies available to them, risking potential loss and missed opportunities. However, there is hope for those willing to spend a little time and effort learning the ins and outs of options trading. By mastering the right strategies, traders can limit risk while maximizing their return. Kavan Choksi offers guidance on the options trading strategies every investor should know, allowing them to harness the flexibility and power of stock options. Don’t let the complexity of options trading scare you away from potential gains – with the right knowledge and approach; you can confidently navigate the options market and come out ahead.
Strategy 1 – Covered Call
An investor purchases the underlying stock with a covered call and simultaneously writes a call option on those shares. This popular strategy generates income and reduces some risk of simply holding onto the stock alone. While it’s true that an investor must be willing to sell their shares at a set price, there are ways to mitigate that risk. For example, let’s suppose the investor buys 100 shares of a stock and simultaneously sells one call option against it. This strategy, known as a covered call, provides some measure of cover in the event of a rapid increase in stock price. Risk and reward are the two key considerations when investing, and savvy investors know how to strike that balance wisely.
Strategy 2- Married Put
The married put strategy could be just the ticket for those seeking to reduce their downside risk. By purchasing an asset and simultaneously purchasing put options, investors can establish a price floor to limit their exposure in the event of a sharp price drop. It’s an intriguing strategy and could be considered an insurance policy, giving you peace of mind knowing that your investment is protected from significant losses. With each contract worth 100 shares, there’s ample opportunity to take advantage of this approach in a way that not only preserves your capital but gives you a chance to profit from your investment.
Kavan Choksi explains if an investor purchases 100 shares of stock and buys one put option, they can rest easy knowing they are protected from negative price changes. Of course, there is always a trade-off; in this case, it comes as a premium paid for the put option. However, for some, the peace of mind from this form of protection may be well worth the cost.
Strategy 3 – Bull Call Spread
A bull call spread strategy might be worth considering for investors feeling bullish about a particular asset’s price. This vertical spread strategy allows the investor to purchase calls at a specific strike price while at the same time selling the same number of calls at a higher strike price. Both options will have the same underlying asset and expiration date. By utilizing this strategy, investors can limit their potential upside while decreasing the net premium spent. It’s a smart and calculated move for those looking for a moderately rising asset price. Overall, using a bull call spread strategy is a solid way for investors to play the market with limited risk and reduced costs.
Strategy 4 – Bear Put Spread
The bear put spread strategy is popular for traders with a pessimistic view of the underlying asset’s performance. Kavan Choksi says that by employing this technique, the investor can purchase put options at a specific strike price and sell the same number of puts at a lower strike price. In doing so, the trader stands to gain if the asset’s price declines while limiting losses in the event of a price increase. This strategy can effectively profit from downward market trends and offers a balanced approach to managing risk. In short, the bear put spread strategy is a powerful tool to keep in your trading arsenal, offering limited gains and losses for those who are savvy enough to employ it.
Strategy 5 – Protective Collar
Investors seeking to protect their gains in a long position may use the protective collar strategy. They can lock in a potential sale price and limit their downside risk by purchasing an out-of-the-money put option and writing an out-of-the-money call option of the same expiration. This strategy can offer peace of mind in volatile markets. However, it’s important to understand the potential trade-offs. Although the long put provides a cushion against losses, the investor may also be obligated to sell shares at a potentially lower price if the call option is exercised. On the flip side, the investor may have to surrender further profits if the shares rise above the price of the call option strike. Ultimately, it’s up to the investor to weigh the pros and cons of this strategy and determine whether it aligns with their investment goals.
Strategy 6 – Long Straddle
Another option is the long straddle options strategy, which can offer investors unlimited gains while limiting their potential losses. This strategy involves purchasing a call and putting an option on the same underlying asset with the same strike price and expiration date. By doing so, investors can profit if the asset price moves significantly in any direction, while the maximum amount they can lose is the cost of both options combined. It’s a strategy often used by investors who believe an asset is primed to make a major move but aren’t sure which direction it will take. While the long straddle strategy may not be for everyone, it’s worth considering for those looking to take advantage of market volatility.
Strategy 7 – Long Strangle
The long strangle options strategy is clever for investors confident that an underlying asset will experience a significant price swing. This approach involves investing in both a call and a put option with different strike prices on the same asset simultaneously and with the same expiration date. While this method may appear risky, Kavan Choksi notes that it is a valuable tool for investors uncertain about which direction the asset’s price will take. For example, it is a popular tactic for investors betting on news from an earnings release or an FDA approval for a pharmaceutical stock. As a bonus, losses are limited to only the premiums spent on both options, making this strategy more affordable than other approaches. The long strangle is truly a unique and thoughtful approach to investment strategy.
