Options trading involves the trader buying and selling options contracts to speculate on the future direction of the underlying asset. For example, if they believe that the price of gold will increase over the next month, they may buy an option contract that gives them the right to buy gold at a specific price (the strike price) over the next month. If the price of gold does indeed increase, the trader can then exercise their option and buy gold at the strike price, resulting in a profit.
However, if the price of gold doesn’t increase or only increases by a small amount, the trader may decide not to exercise their option. In this case, they would still lose the premium they paid for the options contract, limiting their losses to this amount.
Many traders choose to use options trading strategies to limit their risk and maximize their chances of success. A well-designed options trading strategy considers several factors, including the trader’s goals, the underlying asset’s price history and volatility, and the option contract’s expiration date.
By using a carefully planned options trading strategy, traders can minimize their risk while still having the potential to make large profits.
Covered Call
A covered call is a strategy that entails buying a stock or other underlying asset and selling call options on that same asset. The goal of a covered call is to generate income through the sale of the call option while also protecting the downside of the stock position.
A drawback is that you may miss out on potential profits if the stock price increases significantly.
Put Selling
Put selling is an options trading strategy that involves selling put options on a stock or other underlying asset. The goal of put selling is to generate income through the sale of the put option while also protecting the downside of the stock position.
A drawback is that you may miss out on potential profits if the stock price drops significantly.
Straddle
A straddle is a strategy that involves buying both a call option and a put option on the same underlying asset. The goal of a straddle is to profit from large price movements in either direction.
The only drawback is that you have to pay the premium for both options contracts, which can be expensive if the stock price doesn’t move much.
Long Call
A long call is an options trading strategy that involves buying a call option on a stock or other underlying asset. The goal of a long call is to profit from a rise in the underlying asset price.
A drawback is that you may miss out on potential profits if the stock price doesn’t increase.
Long Put
A long put is an options trading strategy that involves buying a put option on a stock or other underlying asset. The goal of a long put is to profit from a decline in the underlying asset price.
A drawback is that you may miss out on potential profits if the stock price doesn’t decrease.
Short Call
A short call is a strategy that involves selling a call option on a stock or other underlying asset. The goal of a short call is to profit from a decline in the underlying asset price.
The only downside is that you may miss out on potential profits if the stock price doesn’t decrease.
Short Put
A short put is an options trading strategy that involves selling a put option on a stock or other underlying asset. The goal is to profit from a rise in the underlying asset price.
A downside is that you may miss out on potential profits if the stock price doesn’t increase.
Butterfly Spread
A butterfly spread is a strategy that involves buying and selling three different options contracts with different strike prices. The goal of a butterfly spread is to profit from a slight movement in the underlying asset price.
A downside is that you may miss out on potential profits if the stock price moves too much.
You can trade options with Saxo Bank.