When you are first starting out, it is easy to get too eager and caught up in the want to start trading right away. However, it is best that you get a good foundation before you begin trading so you are able to fully understand how options work as well as how they are going to be able to help you achieve the goals that you have set. You will learn some strategies that are going to be easier for you to understand. Not only that but they will be less risky than owning stock. Many of the strategies involve limited risk.
- Covered call writing: you can either use stock that you own or buy new
stock so that you can sell to someone else a call option that will give the buyer the ability to buy stock at a price that was previously agreed upon. This will limit your profits.
However, you will be collecting a premium that will be yours to keep despite what happens. The cash will then reduce your cost. So, if the stock happens to decline, you may risk a loss, but this will be better than if you had owned the shares.
Example: you buy 100 shares of IBM
You will then sell one of those IBMs Jan 110 call
- Cash secured naked put writing: you are going to sell a put option that
you want to win. In choosing the strike price that will represent the amount that you willing to pay for that stock, you then will collect a premium that is an obligation to buy the stock at the strike price.
If you change your mind and do not want to purchase the stock, you are going to keep the cash as a consolation prize. But, if you keep enough money in your account to buy shares, then you are
going to be considered cash secure.
Example: You sell AMZN Jul 50 put and keep $6,000 in your account
- Collar: a collar is what a covered call position is, but it also includes a put. The put will act as an insurance policy therefore limiting the loss to a minimal
The profits will end up being limited, however, a conservative investor is
going to find that it will be a good trade off. The limited profits will mean that there will be a limited amount of losses.
Example: you buy 100 shares of IBM. However, you sell one IBM Jan 115 call, and you end up buying one IBM Jan 90 put.
- Credit spread: when you purchase one call options and sell another or if you purchase one put option while selling another. These options are going to have the same expiration. This is called a credit spread being that the investor will collect cash for any trade that happens.
So, if the higher priced option is bought, then the less expensive one is going to be purchased as well. This strategy will be a bit market bias, but it will have limited profits with limited losses.
Example: you buy 5 JNJ Jul 60 calls and sell 5 JNJ Jul 55 calls.
Or, you buy 5 SPY Apr 78 puts while selling 5 SPY Apr 80 puts
- Iron condor: this is a position that will consist of having one call credit spread as well as one put credit spread. Once again your losses and gains are going to be
Example: sell 2 SPX May 960 calls and buy 2 SPX May 880 calls
As well as, sell 2 SPX May 760 puts and buy 2 SPX May 540 puts
- Diagonal spread: these spreads are options are going to have different strike prices as well as different expiration dates. When the option bought expires, then the option will be sold.
Example: buy 3 XOM Nov 78 puts while selling 9 XOM Oct 100 puts. This is a diagonal spread.
Or, sell 6 XOM Nov 75 calls and buy 7 OXM Nov 54 calls. This is also a diagonal spread.
Either way, if you hold both positions in the same period of time, then it will be considered a double diagonal spread.