Options trading is the act of speculating over the future price movements of an asset by buying or selling options contracts. An option contract is simply a legal agreement that gives the owner of that contract the right to buy or sell underlying security (such as shares in a company) at a specific price on or before a specific date. There are two types of options:
- a call option.
- a put option.
When you own an option call, you have bought the right to buy underlying security within a given time frame at a specific price. However, the price that you pay for an options contract is only a fraction of the actual value of that contract. This is because there are two different types of options.:
The price paid for an options contract depends on which type of contract it is and how likely it will be ‘in-the-money (ITM) at expiry. If it’s more likely to be ITM, the price paid will be higher than if it’s less likely to be ITM. Because we don’t know what future prices will do, we can never really say what any options contract is actually worth. Still, as a rough guide, each ($100) options contract represents $10,000 worth of underlying equity.
How to find the most profitable options trading strategy?
The first step in finding the most profitable options trading strategy would be to analyse available strategies thoroughly. To do this, traders can refer to their broker’s website, or they can research online. An investor may find that there are over 100 different types of options trading strategies. So it is essential to narrow the list down by eliminating those that are not profitable.
The overall benefit of finding profitable options trading strategies is that they can add much greater efficiency to an investor’s portfolio by minimising losses and maximising gains when used correctly. It generally allows investors to profit from market movements if they are accurate in their predictions.
However, being wrong can also have disastrous results for an investor who has put all of his eggs in one basket with only a single options trading strategy. It is important to remember that there is risk involved with any investing strategy, so it is essential to invest only the amount of money you are willing to lose.
Bull call spread
A profitable options trading strategy often used is called “bull call spread”. The technique involves buying one call option while selling another, with both options having the same underlying security and expiry. The trader then hopes that the underlying security price will increase enough to make a profit on his investment. However, if the prices drop below expected, the trader only loses money on his initial investment.
A common options trading strategy used is called a “covered call”. This strategy involves selling a call option on underlying security while owning it at the same time. The trader hopes that whatever price increase they receive from the sale will be greater than what is lost when the option expires, and they no longer own that security. If this is not the case, then it can be a losing proposition for an investor.
Another one of the most profitable options trading strategies is called “straddle”. This strategy involves buying both puts and calls with the same strike price and expiry. Traders will usually use it when they see a significant price movement in the underlying security. The investor hopes that this price movement will be in their favour to profit from the options they have purchased.
Trade like a pro
It’s always best to learn from professional traders and follow their example. They have paid the price for gaining a wealth of knowledge and are typically not afraid to share it with rookies. Find a trusted broker and spend time learning from them.