By Charlie Brown

Laden with challenges and excitement of a different kind, trading has gained popularity for many. There are several types and norms of trading. If you have dabbled into the trading space, you sure have heard about options trading. If you are a beginner, then you would need to research and know about it more.

Understanding options trading

Simply put, options get termed as the conditional derivative contracts. It enables buyers of a particular agreement to sell or buy certain security at a selected price. Generally, the option buyers get charged by a premium amount by the sellers for this right. Just in case, the market price isn’t favorable for the option holders, and they will allow the option to expire without accumulating any worth. It ensures that the losses don’t exceed more than the premium. And on the other end of the spectrum, there are the option sellers who take on an increased risk than the option buyers. And that is the reason why they ask for a premium.

Generally, the options get divided into “put” and “call” options. Using a call option, the contract buyer buys the right to purchase an underlying asset in future at an already determined price. It is known as a strike or exercise price. And using the put option, a buyer will get the right to sell an underlying asset at a fixed price in future.

Reasons to trade options than in direct asset

Trading options bring with it a set of benefits . Today, the Chicago Board of Options Exchange (CBOE), the biggest exchange globally, provides opportunities on a full mix of the single stocks, indexes and ETF’s. The traders can develop option strategies that range from selling and buying one option to complicated ones, that has many options positions simultaneously.

Discussed below are the essential beginners guide to options trading that you can refer to:

1. The Buying Call Strategy

It is one of the most preferred strategies for the traders who are very confident about a particular stock, index, and ETF and also wishes to restrict their risk. And it's also applicable to traders who want to make the most of the increasing prices.

The options are leveraged devices. It means they enable the traders to magnify the advantage by putting to risk the minimal amounts. Otherwise one had to trade with the underlying asset. A decent option contract on stock usually manages 100 shares of an underlying security.

2. The Buying Puts Strategy

This options trading strategy is apt for traders who get fixated on a chosen stock, index, and ETF. Also, these traders want to lessen their risks instead of short-selling their trading strategy. Alternatively, it also is preferable for those traders who wish to make use of the reducing price and leverage the benefits.

As the name suggests, the put option is the precise opposite to a call option. Hence, the put option increases its value as the underlying asset value minimizes. Here the short-selling enables the trader to make his/her profit from the reduced prices. Additionally, the risk with a short position is limitless. It is because in theory there’s no end to what limit a price can go up. Furthermore, when you have a put option, if an underlying asset increases past the strike price of the opportunity, then the choice is simply going to expire without having any worth.

3. A Covered Call Strategy

This particular strategy is perfect for the traders don’t expect any change or even a littleincrease in the price of the underlying asset. It is also for those traders who want to restrict their upside potential in exchange for downside security.

Simply put, a cover call trading strategy is all about purchasing as many as 100 shares of the underlying asset as well as selling the call option against the shares. The moment a trader sells away the call, then he/she collates the option’s premium amount. It reduces the cost basis on shares and also gives downside security. And in return, just by selling out the opportunity, the novice trader agrees to sell off shares of an underlying asset of the strike price of the opportunity. It, in turn, caps the upside potential of the trader.

4. The Protective Put Strategy

This trading options strategy is perfect for the traders who want to own an underlying asset and also wants the downside security. Simply put, a protective put is a long put. The primary objective, however, is to attain downside protection against trying to make profits from the downside move. Just in case the trader owns shares of which he/she is very confident in the long run, but also wishes to secure the same against any short-run decline, then he/she can buy a protective put.

The cost of the underlying asset can rise and be more than the strike price of the put during maturity. In such a situation, the option will expire without any worth. The trader too loses the entire premium. However, he still retains the benefit of the maximized underlying asset price. And similarly, the cost of the underlying asset can fall. In that case, the portfolio position of the trader loses its value. However, this loss gets covered to a great extent by the gain that results from put's option placement. Therefore, this placement also works as an insurance strategy.

Furthermore, the novice traders also have the option to strike price lesser than the current cost to bring down the premium payment at the expense of minimizing downside security.

And this is often termed as deductible insurance.

One can conclude that options provide alternative ways to investors to make profits from trading in underlying securities. And today, many strategies comprise multiple combinations of underlying assets and many other derivatives. The fundamental strategy for beginners also contains buying puts, buying calls, selling the covered calls and purchasing protective puts. Today, there are several benefits to trading choices instead of underlying assets. For instance, there is leveraged returns and downside security. However, the primary step to get into trading options is to select an ace broker. Once you do that, you can go ahead with your trading equipped with expert guidance at hand.

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