Rookie traders often don’t step into options buying and selling because they don’t have an in-depth knowledge of options trading. This article aims to shed light on options trading, and we have gathered some good strategies to help you wade through those murky waters. Once you cross that and understand, there is a whole ocean of opportunities ahead of you.
Stable Stocks and indices take months and sometimes even years to show significant movements and profits. You have to invest lakhs of money and time to gain profits in thousands. Therefore, to create opportunities for retail investors, derivatives were created. Derivatives are contracts that give the buyers the right to buy or sell in the future at a predicted price.
Options are like betting that your desired stock will reach a particular price within a given time. Buying a stock at a lower price and expecting a higher price is called a call option, and buying at a higher price and selling at a lower price is called a put option.
As a beginner, here are a few devised strategies that work in the market effectively. Learn these and begin your trading journey with eToro.
Options Trading Strategies
- This is a good and simple one to use when the market is an uptrend.
- Choose a stock or index with high liquidity and analyze whether it is in the uptrend.
- Then choose a strike that is over the money of the current price.
- Always choose round-off strikes, as they have higher price action.
- If you choose this strategy at the beginning of the month, the strike you have chosen will be achieved within the month’s expiry.
- This works in the bearish trend when the market is falling.
- This works best for stocks with high price action.
- Choose the strike around the following 100 points, as there will be more volume in this strike.
- This strategy is best used in the first week of the month. You can either wait until your target money or wait until the expiry, hoping there is no trend reversal.
- If you have been trading, then you know how news affects markets. Big announcements or news like election results, budgets, war, or a pandemic that could impact the economy could cause waves of disruption in the market.
- This strategy works best when there is high volatility.
- In this strategy, buy both put and call options of the same strike price.
- Remember to buy At the Money strike.
- You will get profit on either end with less loss on another side.
Short Call/ Naked Call
- This is best used when the stock begins to move downtrend.
- It is best used at the beginning of the month when the premium of the strike is total.
- Use a monthly time frame for this analysis.
- Stocks with less volatility, lesser lot size, and low liquidity are ideal.
- Selling strategies require high margins for investment, but the probability of profits is as high as 95% here.
Naked Put/ Short Put
- This is an option selling strategy; this is a buy first, sell later strategy.
- You can square off whenever you want within the expiry day.
- This is best used when the stock is in an uptrend.
- Select stock with less volatility, less liquidity, and smaller lot size.
- Here, since the loss is unlimited, the premium is higher. Therefore, the initial margin of the amount invested is also higher.
These are some of the basic, simple, and proven strategies in the market. You can use these alone and make profits. Remember, a little knowledge can be a dangerous thing. Therefore, learn and practice with a demo account on eToro, before risking money in the market. Make yourself familiar with the charts, and then begin options trading.