Options Trading Strategies
Common Options Trading Strategies
The Covered Call- This is a very common trading strategy used by options traders every day. The concept is pretty simple: Buy stock and sell it for more than you paid. Here’s how it works:
You, the investor, purchases 100 shares of a stock that you know will either maintain its value or increase. You should also be comfortable with selling it. Next, pick a selling price, also known as a strike price that is a few dollars over its current value or what you paid for it, but not too far out of reach that the stock couldn’t rise that high in the next 60-90 days. Lastly, choose an expiration date and premium price. Ideally your expiration date will be in the next 60-90 days in order to realize your profits as soon as possible. The premium price is the price you will be selling your option for. Ideally, this price will be around 2% of the total value of the contract. This strategy can have several outcomes, but regardless of the market shift, you will make money.
• If the stock decreases in value, the purchaser will allow the option to expire and while your stock is worth less, you still have it PLUS the premium paid by the investor to purchase your call.
• If the stock increases, you will realize the profits from the stock sale PLUS the premium paid to purchase your option.
The Protective Put-This is also a common trading strategy that allows investors to protect themselves against losses. Here’s how it works:
You own 100 shares of stock in Company XYZ that is currently worth $10 per share and are afraid the company is losing market share and value. You purchase a put option that allows him to sell his shares at $9 per share for up to 90 days as an insurance policy against additional loss. After 60 days, the value of the stock plummets to $4 per share, so you exercise your protective put option and place your shares on the market for $9 per share, limiting your loss to only $1 per share or $100 instead of $6 per share, or $600.
