OPTIONS TRADING STRATEGIES: Best Strategies for Beginners

Options trading is a contract that allows or enables an investor to either buy or sell stocks, securities, mortgages, ETFs, or any commodity at a predetermined price on a specific date. It allows a stock trader to choose or diversify to manage risks and make a profit. Options trading requires a clear understanding of strategies and risk management in carrying out a trade. However, it is carried out based on strategies that help an investor stay protected, leverage funds, and make more income in the stock market. These strategies are complex and complicated, but we will make you understand the best option trading strategies, beginners’ option trading strategies, and the best books on options strategies for beginners to use.

Options Trading Strategies

These are plans or technical analyses that guide a trader in buying and selling securities, stocks, etc. These strategies enable a trader to limit risk and maximize return at any point of the trade in the stock market. However, are tactics primarily designed to handle systemic risk, which is unavoidable yet can have a catastrophic effect on trade. 

Moreover, a trader must conduct extensive market research on current market trends and patterns before making a trade. When creating a strategy, a trader should consult a broker-dealer to choose profitable trading instruments and manage trading operations.

Beginners’ Options Trading Strategies 

Option trading strategies for beginners are

• Buy call
• Buy put
• Covered Call
• Covered put

#1. Buy call

 It is a bullish strategy that simply means buying on a call. This strategy is used when a trader suspects the market’s price movement is in an upward direction. Here, the trader is said to be bullish, so they place a call (long call or short) to make a profit.

For example, gold is trading at $50. A trader is expecting the market price to move up, so he buys a call option of gold at the contract of 1 carat, having a strike price of $50. The cost is $50 and the premium is $50*1. Then, as the market price moves up from $50 to $90. He makes  $250 at $80.

Loss: The loss is the premium paid for the option. At any point between the strike price A and the break-even point, you will make a loss, although not the maximum loss.

 #2. Buy put

 It is a bearish strategy used when a trader expects the market price direction to be in a downwards direction. The trader is said to be bearish, so he places a put as a right for the buyer to sell his stock at a predetermined price. Meanwhile, the risk is limited on the upside if the underlying stock rallies.

For example, gold is trading at $50. A trader X is expecting the market price direction to move down, so he buys a put option on gold at the contract of 1 carat with a strike at $50. The cost is $50 and the premium is $50*1. Then, as the market price moves down from $50 to $90, he makes $150 for $70.

#3. Covered call

This is a neutral strategy that is devised when a trader holds a share but expects a minor increase or decrease in the underlying stock price but is moderately bullish in the near term. Therefore, a trader sells a call option on a stock he owns.

Meanwhile, if the stock remains below the strike price at expiration, the call seller keeps it and can write another covered call. Meanwhile, if the stock rises above the strike price, the investor must sell the shares to the call buyer at the strike price.

For example, if gold is trading at $60, and the trader already bought 1 lot of gold at $50. This strategy is applied by selling a call option strike at $70 @ 5. The trader is not expecting the underlying price to cross $70.

#4. Covered Put

This is also a neutral strategy that is devised when traders holding shares expect a minor increase or decrease in the underlying stock price, but is moderately bearish in the near term. Hence, a trader sells a put option on a stock he owns.

Meanwhile, If the stock rises above the strike price, the trader must sell the shares to the call buyer at the strike price.

For example, if gold is trading at $60 and the trader has already sold one lot size of gold at $70, This strategy is applied by selling a put option strike at $50 @ 5 when the trader is not expecting the underlying price to cross $50.

Best Options Trading Strategies

#1. Bullish Strategies 

This is one of the best options strategies employed when an investor predicts the market price of an asset will rise. To make a profit, an investor is to buy a call either long or short. 

 However, if the market price goes the other way, the investor is at risk of making a loss. But there is an option to limit risk used by numerous investors when the asset price increase is moderate, which is the bull call spread strategy. The call spread strategy simply allows the investors to make the smallest profit and, at the same time, minimize their loss. Meanwhile, the investor has to purchase two call options, one with a higher strike price and the other with a lower strike price. One of its advantages is that a trader can join a position that gains from an increase in the price of the underlying securities while also controlling other critical aspects like the level of risk or the quantity of cash necessary.

Other bullish options strategies are

• Long call 
• short put
• Bull Call Spread
• Bull Put Spread
• Bull Ratio Spread
• Short Bull Ratio Spread
• Bull Butterfly Spread
• Bull Condor Spread
• Bull Call Ladder Spread

#2. Bearish Strategies 

This is a strategy used by investors when they expect the market price direction of an asset to fall downwards within a predetermined time. The investor monitors the market and makes a profit by purchasing a long put option for a high fall in price, but it’s risky if the market price direction goes otherwise. 

However, a bear spread is used to manage the risk of making a loss when the market price change rate is moderate. Other bearish options are:

• Long Put
• Short Call
• Bear Put Spread
• Bear Call Spread
• Bear Ratio Spread
• Short Bear Ratio Spread
• Bear Butterfly Spread
• Bear Put Ladder Spread

#3. Neutral Strategies

This is a strategy employed when an investor expects a non-directional movement of an asset price. The direction is meant to maintain a uniform rise and fall movement within a determined range. However, a trader makes his gain based on market price volatility by selling various strike calls and putting options in the hopes that the stock will stay in a defined range. Meanwhile, it can be bullish volatility when the rise and fall direction of an asset price is high and bearish volatility when the rise and fall direction of an asset price is at its minimum. This is one of the options trading strategies for beginners.

Neutral option strategies are 

• Covered Call
• Covered Call Collar
• Covered Put
• Short Straddle
• Short Strangle
• Short Gut
• Calendar Call Spread
• Spread the word!
• Call Ratio Spread
• Put Ratio Spread
• Calendar Straddle
• Butterfly Spread
• Condor Spread
• Albatross Spread
• Iron butterfly spread
• Iron Albatross Spread

#4. Stock Combination Strategy 

This is a strategy that combines the put and call options on the same underlying asset. 

It is a technique in which a trader buys or sells two options with the same expiration date but different strike prices on the same underlying asset. However, on or before the expiration date, the combination approach allows you to profit from the difference in strike prices. It employs strategies such as the spread and straddle.

While the phrase “combination” can refer to any collection of financial contracts, it’s most commonly associated with options. Traders frequently choose this approach because it reduces risk by delivering reward payoffs tailored to the trader’s risk tolerance. Therefore, it is not one of the options trading strategies for beginners.

 Furthermore, it can lower risk and benefit from alternatives like time expiration and market volatility. Examples of combinations are

• Collars
• Straddles

#5. Event-Driven Strategy

This is a strategy whereby traders capitalize on pricing inefficiencies caused by corporate events such as mergers, acquisitions, spin-offs, and bankruptcies.

 However, it is a strategy that focuses solely on temporary stock mispricing that occurs before or after a business event. Because it necessitates the essential skills to assess corporate events for successful implementation, it is most commonly utilized by private equity or hedge funds. Furthermore, takeovers, restructurings, bankruptcy, mergers and acquisitions, spinoffs, and many other business events are examples of corporate events. An event-driven approach takes advantage of a company’s stock price’s tendency to drop during a period of transition.

Types of event-driven strategies are

• Merger Arbitrage 
• Convertible Arbitrage
• Special Situations
• Distressed Investing
• Activist Investing

Books on Options Trading Strategies

There are numerous books written on options trading strategies, but the books listed below are the best.

Trading Options for Dummies by Joe Duarte

This book was given that name since it was created for novices and anyone with little or no knowledge to grasp. It is one of the best books written on options trading strategies as it is aimed at beginner investors and walks them through the fundamentals of options strategies. Joe Duarte presented step-by-step guidance on how to choose the best options for your portfolio, including how to protect an investment from a falling market, increase investment returns, and even profit from a security’s price volatility without selling.

Options as a Strategic Investment by Lawrence McMillan

Lawrence wrote most of the best books on options trading strategies for beginners, but this book will enlighten investors about certain option strategies and the market conditions in which they are most effective. It emphasized investments that will help you maximize your understanding of options, thereby increasing your profits. Lawrence has written other books on options trading strategies for beginners, but this one is also for professionals.

Covered Calls for Beginners by Scott Douglas (Author), Mark Williams (Narrator), and Randall Stewart (Publisher)

This is said to be the best book for retirees. Due to recent stock market uncertainties, Scott addressed how to improve one’s financial status, especially if they have never been successful in the stock market previously. The book explains the foundations of covered calls, the best tactics for choosing a strike price, and why the covered call strategy is beneficial to retirees who trade options.

Options Trading Crash Course by Frank Richmond

The author considers beginners who have little knowledge of the stock market. This book will help investors to better understand the options market from scratch, find the right investment, calculate risk, and make a profit. It talks more about the option strategies to make the best use of your investment capital.

Option Volatility and Pricing by Sheldon Natenberg

This book is for professionals who want to master many options trading strategies, risk management techniques, and how theoretical pricing models function. However, it is preferable and encouraged for professional traders to learn how to apply the principles of option evaluation to design strategies that have the best likelihood of success given a trader’s assessment of market circumstances and trends.

Things to Note About Options as a Beginner

• Learn about options
• Choose a good online broker
• Open and familiarize yourself with the option account
• Practice trading options
• Start trading in options

Common Mistakes in Option Trading

• Choosing the wrong expiration date
• Ignoring volatility
• No trading plan
• Ignoring the use of probability
• Limiting to one strategy
• Using margins to buy options
• Lack an exit plan

What Is the Most Successful Options Strategy?

One of the best option strategy is the bullish options trading strategies. For example, Bull Call Spread is made by purchasing one call option and selling another call option at the same time with a lower cost and a higher strike price, both of which have the same expiration date.

10 Traits for a Successful Options Trader

• Patience
• Disciplined
• Ability to take risks
• Math skills
• Active learner
• Flexible
• Excellent record keeping

What’s the Difference Between Futures and Options?

• An option gives the buyer the right, but not the obligation, to buy (or sell) an asset at a specific price at any time during the life of the contract. While, A futures contract obligates the buyer to purchase a specific asset, and the seller to sell and deliver that asset, at a specific future date.
• You have to pay a margin when you buy a future, and premium while buying options
• A future contract is executed on the agreed date in the contract . While, an option contract can executed at any time before the expiry date.

What Is a Strike Price?

A strike price of an option is the price which an call or put options contract can be exercised. Choosing the right strike price is one of the key decision an investor has to make when investing in options.

Is Options and Stocks the Same?

They are not.

• Stocks also called equities allows shareholders to own part of the business. Options are derivative contracts used to trade on different assets, including stocks.
• Stocks are for a long period of time, while options are for short term investments.
• Options come with no benefits to the options holder. But stocks allows benefits such as dividends, voting rights.

What’s the Difference Between a Call Option and Put Option?

• A call option is used when prices are speculated to rise. However, a put option is chosen when prices are expected to fall.
• Call option gives the right to buy an assets at a fixed date for a specific price. While, put options allows you to sell an asset for a fixed price at a future date.

Conclusion.

The best advice for beginners trading options is to take their time learning and keep it simple. It is better to start with low risk options and find their way into higher risks options. There are certain recommended books on option trading strategies that every beginner should read. Books such as Options Trading Crash Course by Frank Richmond. Learning about beginners options trading strategies like selling covered puts, buying long calls, etc. There is a high tendency to yield high returns and at the same time make losses in relatively short period of time.

Options Trading Strategies FAQs

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Options trading is not gambling because, unlike gambling, it doesn’t depend solely on luck and it has different strategies for risk control.

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the covered call is the safest options strategy because it is a neutral strategy that helps investors make a profit and they can also restrict prospective benefits from stock price rises.

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Daniel J Zanger is the world’s richest option trader because stock market portfolio records that he gained 29000% of his trade in 1 year by turning 10,775 dollars to 18 million dollars

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