Stock option trading strategies run the gamut from simple to exotic. To the beginner investor, the difference is not always plain to see. Therefore, it helps to have as much information as possible before embarking on a new way to grow their money.
Essentially, there are five simple options that are based on two fundamental types: calls and puts. A call gives the beginner investor the right to buy a stock. Puts give the investor the right to sell at a predetermined price by a specific timeframe.
Although simple does not equal risk-free, these are good ways to get started in the trading arena.
1. The Long Call
The long call is a straightforward strategy where a person buys a call option. The expectation is that before expiration, the underlying stock will rise above the strike price.
2. The Long Put
Similar to the long call, the long put requires wagering on the decline of a stock instead of its rise.
3. The Short Put
As the opposite of the long put, the short put strategy wagers that the stock will either rise or stay flat until expiration. Based on this expectation, the investor sells a put.
4. The Covered Call
First, the investor must own the underlying stock before selling a call on the stock. Also, the investor gives away any appreciation above the strike price in exchange for a premium payment.
5. The Married Put
As the name implies, a married put combines a long put with the investor owning the underlying stock.
The Bottom Line
Beginners can use stock option trading strategies while becoming comfortable with growing their money.