For investors interested in trading options as an option holder, it’s crucial to understand what options are, how they work, and the risks involved. An options contract gives the buyer the right to buy or sell an asset at a set price within a specific time frame. The buyer is not obligated to buy or sell the asset.

Trading options can be highly rewarding, but it’s also complex and risky. By taking the time to learn the fundamentals, practicing with simulated trading, and starting with small positions, you can develop your skills over time. The key to successful options trading is having a clear strategy, a strong understanding of the risks, and the discipline to manage your positions effectively.

Here’s some basics and potential strategies to consider.

What Is Options Trading?

There are two main types of options. If you are long an options position, a put option gives the holder the right to sell an underlying asset at a specific price (strike price) before the option expires; a call option gives the holder the right to buy an underlying asset at a strike price  before the option expires.

To acquire an option, investors must pay a price called the premium. This is the price paid by an option buyer to the seller for the right to buy or sell an underlying asset at a predetermined price within a specific time period.

Options trading involves the buying and selling of these put and call options, either separately or in combination, to create various investment strategies. Options markets exist for many liquid assets, including stocks and bonds, allowing investors to hedge or speculate based on price movements.

Significance of Understanding Options Strategies

Understanding options strategies can be helpful for several reasons, including:

• Options strategies can help traders manage risk more effectively. By employing techniques such as protective puts or covered calls, investors can hedge their positions, seeking to limit potential losses while still participating in market movements.
• Options can provide leverage, allowing traders to control larger positions with a smaller capital outlay. Understanding how to utilize different strategies may enhance profit potential while maintaining an awareness of associated risks.
• Knowledge of options strategies fosters a deeper understanding of market dynamics and price behavior. Traders can learn to analyze implied volatility, time decay, and the Greeks (Delta, Gamma, Theta, Vega), which can be helpful for evaluating options pricing and risk profiles .
• Options trading can be challenging, especially in volatile markets. Understanding various strategies and their outcomes can help novice traders manage their expectations and develop a disciplined trading approach, reducing the likelihood of impulsive decisions.

But before an investor can begin trading options, they need to be approved, based on four options trading levels. 

Moomoo offers a one-stop options trading app, providing mainstream options strategies to enhance your trading experience.

Long Call and Put

Long call options provide the holder with the right, not the obligation, to purchase an asset at a set price within a specific timeframe. Long put options allow the holder the right, without obligation, to sell an asset at a predetermined price. Both options can be used as speculative strategies based on the anticipated direction of the underlying asset’s price.

While these strategies offer potential gains, effectiveness requires close attention to factors such as time decay—where option value generally diminishes as expiration approaches—and volatility, which can significantly impact option pricing. Carefully managing these factors can help in managing risk while also potentially enhancing the chances of profitability.

Long Call

With a long call option, an investor pays an upfront premium for the right, not the obligation, to purchase an asset at a specified strike price within a set period. If the asset’s market price exceeds the strike price at expiration, the option is considered “in-the-money (ITM).” In this scenario, an investor may exercise the option, assuming you have the funds to purchase the required shares (typically 100 shares per contract).

If the option is “out-of-the-money (OTM)” at expiration (the asset’s market price is below the strike price) there’s no financial benefit to exercising it, and the option expires worthless, resulting in a loss of the premium paid.

Alternatively, a long call position can be closed by selling the option anytime before expiration, at either the market or a specified limit price. If the option is sold for a higher premium than the original purchase price, the investor realizes a profit, less any transaction fees or commissions.

Like any trading strategy, a long call option has associated risks including time decay (losing value as the expiration date approaches), the potential for the underlying asset price to not rise above the strike price causing the option to expire worthless, and significant sensitivity to volatility changes in the underlying asset; meaning your maximum loss is limited to the premium paid for the option, but you could miss out on potential gains if the stock price doesn’t move as expected.

Other potential risk factors include interest rate fluctuations, which can affect option pricing; changes in the underlying stock’s performance; limited liquidity and bid-ask spread variations; and, if exercised, the financial commitment required to purchase the underlying shares along with the resulting risk of holding the underlying shares.

Long Put

A long put option allows an investor to potentially profit from a decline in the underlying asset’s value. This strategy can be used for both speculative purposes and capital preservation. With a long put, the investor has the right, but not the obligation, to sell the asset at a predetermined strike price within a specified time frame (until the option’s expiration date).

If the option expires OTM (the market price is above the strike price), the option will expire worthless, resulting in a total loss of the premium paid.

The primary risk of a long put option is that if the underlying security price does not fall below the strike price by the expiration date, the option will expire worthless, meaning the buyer loses the entire premium paid for the put option, which is the maximum potential loss on the trade. Essentially, you only lose the money you paid to buy the option, not more than that.

– Covered Call

In a covered call strategy, an investor who already holds a long position in an asset sells an equivalent amount of call options on that same asset. This approach is commonly used to generate additional income through the premiums received from the call option or to offer partial protection against small declines in the asset’s price.

When a covered call writer is assigned, the option buyer has chosen to exercise their right to purchase the shares at the strike price, obligating the writer to sell. The potential profit or loss from this strategy will depend on the initial purchase price of the shares and the premium received from selling the call option.

If the shares were originally bought for less than the strike price, the investor can still realize a profit. If they were purchased for more, there may be a loss if the difference in purchase price to strike price is greater than the premium received for the sold call option/s.

Regardless of whether the option is exercised, the writer keeps the premium, providing additional income even if they are required to sell their shares.

Married Put

A married put (often referred to as a protective put) involves purchasing put options while simultaneously buying an equivalent amount of the underlying stock, paying the premium for the put options. This strategy offers downside protection below the strike price of the put and remains effective only as long as it is in place or until the expiration date. If the stock price declines, the put options function like insurance, which may help to limit potential losses.

FAQs about options trading strategies

Which strategies are good for beginner’s option trading?

Covered calls involve owning the underlying stock and selling call options against it. It allows investors to generate income through premiums while potentially selling their stock at a predetermined price. The premium received can help to lower the effective cost basis of the underlying shares; however, there is the risk of assignment which would cause your shares to be called away.

Cash-secured puts are when an investor sells put options while simultaneously setting aside enough cash in their trading account to purchase the stock if the option is exercised. This approach can generate income from premiums while providing a potential safety net if the stock price drops.

Buying calls or puts outright can be a simple way to participate in options trading. Long calls allow investors to potentially profit from upward price movements, while long puts can be used to potentially profit from declines.

The theoretical maximum loss for long options is generally limited to the premium paid. However, if the holder exercises the option potential losses can be significant (call) to unlimited (put).

How can investors potentially profit in option trading?

Investors can potentially profit from options trading through several strategies, each capitalizing on different market conditions and price movements.

Options allow investors to control a larger amount of stock with a smaller capital outlay compared to buying shares outright. For instance, purchasing call options gives investors the right to buy shares at a predetermined price, enabling them to possibly profit from stock price increases while risking only the premium paid for the options. Purchasing put options gives investors the right to sell the underlying asset at a specific “strike price.” If the price of the underlying asset falls below the strike price, the value of the put option increases, allowing the investor the potential to either sell the put at a profit or exercise it to sell the underlying asset at a higher price than the current market value.

Strategies like selling covered calls or cash-secured puts may provide an income stream from the premiums received.

How can beginners learn about option trading?

Beginning options traders can learn about options trading through various resources, including online courses, tutorials, webinars, and trading communities. Here are some ways to gain knowledge and try to develop skills in options trading:

• Online Courses: Many platforms offer structured courses on options trading, catering to various skill levels. 
• Webinars and Seminars: Participating in live webinars and seminars hosted by seasoned traders can provide real-time insights and the opportunity to ask questions.
• Paper trading: Practicing paper trading on a trading platform allows new traders to execute options trades in a virtual environment without risking real money.
• Online Communities and Forums: Engaging with online trading communities can help traders share experiences, ask questions, and learn from others’ successes and mistakes.
• Podcasts and YouTube Channels: Listening to podcasts or watching educational videos on YouTube can provide insights and diverse perspectives on options trading.