5 Strategies Every Options Trader should know

Options trading are not an easy way of trading derivatives. Before you sit in front of an options terminal and start investing, it is extremely important for every options trader to know certain important aspects.

  1. What is Naked Call Option?

When it comes to options trading, one of the most common forms is the call option trading. Call option is typically an agreement on the basis of which an investor acquires the right of buying an underlying security (stock, commodity, bond, or any other financial instrument) within a specific time period at a specified price. However, buying a call option doesn’t exert any obligation of buying the underlying asset at the pre-determined price.

When seller of a call option contract doesn’t possess enough or any underlying security for protecting against adverse movements of price, it is called naked call option trading position. Most inexperienced traders make the most common mistake of taking naked call positions, which are extremely risky.

  1. What is Covered Call Option?

It is also known as buy-write strategy. Per this strategy, two positions are taken simultaneously. On one hand, you buy the underlying asset and on the other you sell (or write) call option of the same underlying asset. This strategy is chosen by investors when they are not sure or neutral about price movement of the asset in short run. An investor can take a covered call position if:

#1 An investor is trying to generate additional profit from the call premium

#2 An investor wants to protect value of the underlying asset against a possible decline

You may consult OptionsXO to know more on options trading strategies.

  1. What is Uncovered Put Strategy?

This strategy is also called “Naked Put”. First, let’s start with the definition of Put options. As the underlying asset’s value decreases, value of the Put Option increases. It helps in protecting portfolio of an investor.

In case of uncovered put option or naked put, writer of the option doesn’t have any short position on the underlying asset. Therefore, the put option here is uncovered and the writer may face heavy loss if the value of underlying asset starts increasing.

  1. What is Long Call Butterfly Strategy?

This trading strategy is opted by traders who look forward to, at the time of the option expiration period, achieve a specific price target for the underlying asset. If the underlying asset acts as body of the entire Call Butterfly strategy, profit is earned. The basic motivation here is correct prediction of asset price at the time of expiration.

Long Call Butterfly Strategy involves a combination of:

  • One long call at upper strike
  • One long call at lower strike
  • Two short calls at middle strike
  1. What is a Married Put Strategy?

This strategy involves simultaneous purchase of a particular asset and put options on equivalent number of underlying assets. Traders adopt it for protecting themselves from incurring potential short-term losses.  If you are bullish on price of an asset, this strategy can be adopted.

If you are interested in binary option trading, simply approach brokers at WMoption for assistance and get started. It is always recommended to start with an asset class on which you are more efficient in predicting the price fluctuations.

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March 7, 2016 5 Strategies Every Options Trader should know