An Easy to Follow Guide on Understanding Options, Options Trading, and the Trading Strategies!

Jesse Anderson

Published on August 17, 2021

Planning to get into the game for real?

Buckle up, because it’s about to be a fun and informative ride getting to know a bit about options!

So, before we even begin talking about the options trading strategies, we must get a grasp on the basics of options. 

Shall we begin?

What Are Options?

Equity-listed options are a written contract between a buyer and a seller.  They state that the buyer will have the right but is not obligated to buy or sell an asset at a predetermined price before the expiration of the contract. Option buyers have the right to buy shares of stock with a call option and the right to sell shares of stock with a put option.  Each option has a predetermined Strike Price and Expiration.  

Option sellers collect a premium from the buyer in exchange for the obligation to buy or sell the stock.  The option seller keeps the premium whether the option is exercised or expires worthless to the buyer.  Pretty straightforward, right?

You can use an options premium screener to determine profit trades. optionDash is a great tool to do just that! See for yourself. 

What is Options Trading?

With calls and puts, buying and selling, options trading can quickly sound overwhelming.  It will become even more complex combining multiple options together.  Today, we want to focus on the basics and what’s appropriate for new option traders.  

While it can seem complicated in the beginning, you will soon begin to understand that trading with options is not only easy but can fetch a decent profit. 

Option Trading Types

We’re looking at identifying the two types of options trading:

1. The European Option can only be exercised when you reach the expiry date. Equity indices use this type of options. 
   
   
2. The American Option can be exercised at any point as long as it falls before the expiry date. This includes exchange-traded funds and stocks. 

Neither of these has anything to do with the region you trade from. 

Moving on, there are a few terms that will be required when you begin trading in options. 

• Premium is the price that will be paid to the seller by the buyer of a particular option.
  
  
• The strike price is the amount at which an options contract can be sold or bought when exercised. 
  
  
• The expiry date is a predetermined date and the last day on which an option holder can exercise their right to buy or sell the asset or security in question.
  
  
• The stock symbol is used to identify the asset that has been used in the options contract. 

Refer to optionDash, a high premium options screener, to know more about the options you plan on trading. 

Options Trading Strategies

The trick to being a great options trader is to get the basics right. There are a lot of strategies out there that can help you in trading. Let’s take a look at some of the most common strategies used by options traders:

• Married Puts

To implement the married puts strategy, one will first have to buy an asset and then purchase a put option for the same number of shares of the asset. When you do this, you get the right to sell off the stock at the strike price giving you downside protection. The reason behind using a married put strategy will be to safeguard yourself in case the stock price was to tumble. Although there’s an unlimited potential to gain profit, your losses are limited once the stock price drops below the put’s strike price. 

What do you think about this options trading strategy? Need more information? Get in touch with us at support@optionDash.com.

• Covered Calls

The beautiful thing about the covered calls strategy is that it has two parts to it. One, where you buy an underlying asset; and two, where you sell call options for the same asset you just bought. You can earn a profit by selling call options as long as the price of the stock does not go beyond the strike price. You can read more about covered calls definition and tutorial here. 

Get yourself a covered call screener like optionDash to ensure you’re making the right decision at every step of your trading journey.

• Long Straddle

If you were to purchase a long call and long put option for the stocks of the same asset, at the same time, same strike price and expiration date, then you’d be using the long straddle strategy. Your goal with this strategy will be to gain a profit when a stock makes a strong move up or down in the market. In most cases, the long straddle is used when a newsworthy event happens.

That’s all from optionDash for now about options. But before we leave you to trade for yourself, here are a few things you must keep in mind:

• When trading in options, start your search with an options premium screener. You will take a calculated risk by taking into consideration the various probabilities and statistics of the market. Make sure you’re also taking into account the volatility of the market, historical and implied. 
  
  
• You’re going to be trading on different underlying securities, like indexes, equities, or ETFs.
  
  
• Read more about the commonly used terms in trading. You’re going to tap into the world of buying and selling of calls and puts, which could be short or long. They could also be at-the, in-the, or out-of-the-money. 
  
  
• Options trading can only begin when you establish your financial goals. 

Keep making efforts to learn and gain experience while trading and investing. If you’re not putting in the time and energy to do so, you might fall short of the knowledge required to get desired profits. 

Options trading can be simple and fetch incredible profits when understood properly. There’s no need to be afraid of it or intimidated by it. Remember what you’ve read and inferred! And if you’re in need of help, optionDash has a screener to get you started. 

Good luck!