If you want to trade in stock options, then you should know a few option trading strategies. For this we first have to know what an option is. An option is a “derivative financial instrument”. It is mainly concerned with the establishing of a contract among two clients and concerns the purchase or sale of an asset.
This is done within a specific time frame and at a fixed reference price. The sale or purchase of one or more option positions and mostly one underlying position is called “option strategy”. These strategies can be favorable to the underlying which is neutral, bearish or bullish.
Various options and futures exchanges list several “standardized options contracts” which are used in trading options. The ticker symbol helps to track down prices and listings option trading tips.
How do parties engage in transactions? They do so with the help of the exchange which publishes live, continuous markets for the option prices. Since the exchange is the intermediary to both the parties, this transaction leads to its profit.
The options trading system is a way to make a lot of money if you know the rules. Here are three vital ways in which you can benefit from your option trading.
Buying Put Options
This is one of the easiest ways stock option trading strategies. If your broker has authorized you, you can use this strategy even in an IRA account. For this you have to first select one stock which you guess will lower in price. This option has a limited risk as you have to pay only up to the “cost of the put option”.
For instance, say Stock Y has a per share price of $50. All you need to do is buy a put option on this stock with the expiration time of two months with the “strike price” of $50. If the stock drops within that period, your put option will be of the value $10 every share.
Buying Bear Put Spread
The option trading system also gives the opportunity of making use of this strategy. This one is a bit more complicated than buying put options but the benefits are also manifold. While reducing your risk, this option strategy increases your profits. This strategy is used when you buy two put options which have expiration in the same month.
In this case, you purchase one at a strike price which is given while you sell the other at a lower strike price. For this it is important to pick up a stock which are confident will fall in value. The risk is limited only to the price of the “put spread”.
When you use a married put, it is also known as a “hedging strategy”. In this case, you purchase a stock that you are confident will increase in value and at the same time, you also buy a put option. This reduces your risk of loss due to any adverse market condition.
To benefit the most from this strategy you need to find out the businesses that appreciate in bear markets. The next thing to do is select appropriate stocks and buy them. Then you buy a put option; this will help you to limit your risks.
It is better to learn options trading before you get involved in option trading. These three are some of the best option trading strategies to make money in the share market.