Options Investors get the right to buy or sell specific stock [without obligation] at a predetermined price and date. It does not matter if the market moves upwards, downwards, or sideways. Investors need less capital to enter, and the risks are lower than stock trading.
Just like stocks trading, to make money trading options, you will need to purchase them at low price and exercise at high rates. Options are of two types.
- Call – It means you call the seller’s stock, which he delivers on the price agreed even if the underlying stock price is more.
- Put – It means you put the stock to a buyer at the agreed price.
There is an expiry date on the contract when you will need to sell or buy the underlying asset. It is called ‘exercising’. You get the right to sell a stock for a high price or buy for a much low price than it is trading at. The agreed-upon price is the strike price that you get while selling or buying the underlying securities while exercising the contract.
For example, the Joylucas firm call option expires on 26th Jan 2024 with a $25 strike price. Here you get to know the four main parts.
- Stock name – Joylucas firm
- Option type – Call
- Strike price – $25
- Expiry date – 26th Jan 2024
If the strike price goes above $25 before 26th Jan 2024, then your trade is ITM [in-the-money]. It means you can exercise your option and purchase the underlying asset for $25. It even indicates that your options are more valuable than the price it was bought at.
If you need a training course, then SteadyOptions is a great center. Before you enter the options market please get educated from professionals.
What impacts the options price?
To earn profits, you need the price to favor an option holder.
- Intrinsic value – It is a difference between current and strike price. If the strike price is lower than the current price, you are in the money [earn profit]. If the strike price is higher than the current price you are out of money [suffer a loss].
- Time value – Contracts that expire in a few days do not get sufficient time to make the trade profitable, so carry less time value. If the expiry date is farther away, the stock gets sufficient space to play, making it more expensive.
- Implied volatility – It calculates the expected stock volatility until expiry. Several factors help to determine implied volatility including the strike price, current price, and risk-free interest rate. High volatility causes the extrinsic value to increase and a good possibility to make profits.
Some great lucrative trading options strategies
Calendar spreads
It is a trade, which involves the sale and purchase of the contracts of the same underlying instrument with different expiry dates. You can spread the risk either – horizontally or diagonally.
- Horizontally means the strike price is the same, but the expiry date differs.
- Diagonally means both strike price and expiry date differ.
It is a risk management tool. The trader will possibly yield from the time decay without a need for a large margin. Besides, the risk is minimal.
Vertical spreads
The strategy involves the buy and sale of contracts of the same options type, same underlying asset, and the same expiry date, but the strike prices are different.
Bearish and bullish strategy
Bear Put spread
Puts of equal numbers are bought and sold. The strike price is low. The underlying asset and expiration date are the same. It means you will need an upfront cost as the contract you purchase will be more costly.
Bull Call spread
A call of equal numbers is bought and sold. The strike price is high. The underlying asset and expiration date are the same. It means you will need an upfront cost as the contract you purchase will be more costly.
These strategies are employed when you are confident about the price movement. If you choose a nearby strike price then your profits, as well as your losses, get limited. Writing the strike price is personal, but a good thumb rule is to choose one that is closely the same to the figure you expect the specific share will be at the expiry time.
Long straddles & strangles
When there is an expectation of high volatility, the traders will position using straddles or stranglers to earn from the market movements. These strategies have the potential to offer unlimited profits if the underlying asset’s price makes a significant move in an upward or downward direction. If the movement is stagnant, then the trader will lose all or most of their premium or purchase price.
- In a long straddle, long calls and puts of the same underlying assets with the same expiry date are purchased.
- In the long strangle, out-of-the-money puts and calls of the same underlying asset expiring on the same date are purchased. The aim is to profit on the volatility, but less capital is needed as the contract is for OTM. There is the upfront cost and your premium gets eaten away with time decay if the movement is not understood.
It does not matter in which direction the underlying asset moves. Traders get opportunities to earn profits from significant moves.
The above strategies seem simple, which can make traders successful in options trading, but it carries some risks. Therefore, when you start new, go slow. You will find that even seasoned traders struggle when the market throws a googly-ball. Therefore, understand your risks and know your limits when you enter a position.
To increase your trade market success, you need to be patient, disciplined, and flexible. Nurturing these qualities will help you make money in the volatile or stagnant market and the bearish or bullish market. Spreading and hedging help to engage in every kind of market condition.
