Options Trading: A Step-By-Step Guide

When it comes to learning how to options trade, there are plenty of things to learn. Although there are plenty of things to learn, there are several strategies to employ that will help you come up with a solid options trading strategy.

First, you’ve got to learn the basics, so here we go:

What is Options Trading?

Options trading can be difficult to nail down with just one definition, but if you are looking for one that cuts to the chase, here it is:

If you are engaging in options trading, then that means that it gives you the ability or right to buy or sell a specific security at a given time or place.

Additionally, this instrument will give people “the right, but not the obligation” to trade these options at a given time and place, as noted by SoFi. 

The best way to sum it up is that an option is known as a contract that is tied to an underlying asset.

For example, an option could be tied to a stock or another security, and the option could have a duration of a couple of days to as long as a few years.

After purchasing the option, you will have the right to trade the option but you aren’t obligated to. If you decide to do so, that is called exercising the option.

How Does Options Trading Work?

There are a couple of things you need to know when it comes to the mechanics of making an options trade.

First of all, there is such a thing as buying what is called a “put”, which is where you are basically purchasing a contract that gives you the option to sell a holding by a given date. 

This means that you think that the given asset will go down by the expiration date.

On the other hand, buying a “call” would make more sense if you think that the price of a given asset is going to rise before the expiration date.

Types of Options Strategies

First of all, the Covered Call or buy-write strategy means that you will simply buy the stocks outright, and then at the same time, you will sell call options on the same stock.

The married put strategy is where you will buy call options with a specific striking strategy and then buy some put options for the same number of shares, thereby acting as an insurance policy against short-term losses. 

The bull call spread strategy means that you will buy call options with a specific strike price but you will sell the same number at a higher strike price.

Additionally, there are plenty of other strategies that an options investor can consider. The Bear Put Strategy is similar to the Bull Call Spread, but it involves buying and selling put options.

The Protective Collar Strategy is a strategy where you buy an out-of-the-money option in the put range.

The Long Strangle Strategy will involve purchasing both an out-of-the-money call option and a put option at the same time. 

Both of these options will need to have the same price in the strike and they must have the same expiration date.

The Butterfly Spread Strategy involves combining both the Bear Spread Strategy and the Bull Spread Strategy.

The Iron Condor Strategy means that you will hold both a short and a long position in several different strangle strategies, and the Iron Butterfly Strategy is a combination of either a short or a long straddle strategy.

Advantages and Risks of Trading Options

There are both a lot of advantages and risks to options trading. First of all, one advantage of options trading is that it can be a great way to make an investment without having to put up a large amount of money. 

Moreover, options trading can often be an excellent way to protect a portfolio and it can be a great way of collecting income.

Some of the cons of options would include watching out for the expiration dates and not being sure of the liquidity.

Additionally, the cost of the premiums involved in options trading can eat away at investor profits.

Conclusion

Options trading is not without risks, but as long as you do your homework, you are sure to find this a profitable venture.