Beginner's Guide to Options Trading Strategies - 12 Proven Methods

Options trading can be a great way to diversify your portfolio and potentially increase profits. However, it can also be overwhelming for beginners who are not familiar with the terminology and strategies involved.

In this article, we will cover some of the best option trading strategies for beginners.

12 Options Trading Strategies for Beginners: Diversify Your Portfolio and Boost Profits!

1. Buying Call Options

A call option gives the buyer the right, but not the obligation, to buy an underlying asset at a specified price, known as the strike price, on or before a specific expiration date. Buying a call option is a bullish strategy, as the buyer profits if the underlying asset increases in price.

2. Buying Put Options

A put option gives the buyer the right, but not the obligation, to sell an underlying asset at a specified price, known as the strike price, on or before a specific expiration date. Buying a put option is a bearish strategy, as the buyer profits if the underlying asset decreases in price.

3. Selling Covered Calls

A covered call involves selling a call option on an underlying asset that you already own. The seller of the call option receives a premium, which provides some downside protection in case the underlying asset decreases in price. However, if the underlying asset increases in price and the call option is exercised, the seller may be forced to sell the asset at the strike price.

4. Selling Cash-Secured Puts

A cash-secured put involves selling a put option on an underlying asset that you would be willing to buy if the option is exercised. The seller of the put option receives a premium, which provides some upside potential if the underlying asset increases in price. However, if the underlying asset decreases in price and the put option is exercised, the seller must purchase the asset at the strike price.

5. Long Straddle

A long straddle involves buying a call option and a put option on the same underlying asset with the same strike price and expiration date. This strategy profits if the underlying asset moves significantly in either direction. However, it also requires a significant move in price to be profitable, and time decay can erode the value of the options.

6. Long Strangle

A long strangle is similar to a long straddle, but the call option and put option have different strike prices. This strategy profits if the underlying asset moves significantly in either direction but requires a larger move in price than a long straddle to be profitable.

7. Bull Call Spread

A bull call spread involves buying a call option at a lower strike price and selling a call option at a higher strike price on the same underlying asset with the same expiration date. This strategy profits if the underlying asset increases in price, but the potential profit is limited.

8. Bear Put Spread

A bear put spread involves buying a put option at a higher strike price and selling a put option at a lower strike price on the same underlying asset with the same expiration date. This strategy profits if the underlying asset decreases in price, but the potential profit is limited.

9. Iron Condor

An iron condor is a popular options trading strategy that involves simultaneously selling a bear call spread and a bull put spread on the same underlying asset with the same expiration date. This strategy profits if the underlying asset trades within a range of prices, between the strike prices of the call and put options. However, the potential profit is limited, and the trader may be exposed to unlimited losses if the underlying asset moves too far in either direction.

10. Protective Collar

A protective collar involves buying a put option as a form of insurance to protect against downside risk on an underlying asset while simultaneously selling a call option to generate income. This strategy can help mitigate losses if the underlying asset decreases in price, but it also limits potential profits if the underlying asset increases in price.

11. Calendar Spread

A calendar spread involves buying and selling two options on the same underlying asset with different expiration dates. The idea behind this strategy is to capitalize on the difference in time decay between the options. The trader buys a longer-term option and sells a shorter-term option, hoping that the shorter-term option will expire worthless, while the longer-term option continues to appreciate in value.

12. Butterfly Spread

A butterfly spread involves buying and selling three options on the same underlying asset with the same expiration date but different strike prices. This strategy profits if the underlying asset trades within a range of prices, between the strike prices of the call and put options. However, the potential profit is limited, and the trader may be exposed to unlimited losses if the underlying asset moves too far in either direction.

In conclusion, options trading can be a great way for beginners to diversify their portfolio and potentially increase profits. However, it is important to remember that options trading involves risk and should only be undertaken after thorough research and consultation with a financial advisor.

The strategies outlined in this article are a great starting point for beginners to explore options trading, but it is important to continue learning and adapting to changing market conditions.