What is Option Strategy?

An option contract is a conditional derivative contract which allows a buyer to sell or buy a security at a certain price in the future. For the option buyers to purchase an options contract, the seller charges a certain "premium". The contract will be void if the market prices are not in favor. Call options and put options are the two types of options. With the first option, the buyer can buy the underlying security at a certain price in the future. A put option gives the buyer the right to sell the asset at a certain price in the future.

What's an option strategy?

You have many options strategies that can maximize your earnings when trading futures or options contracts. These can be broken down into buying put options at a specific frequency or buying call options. Below are the options strategies:

1. Long-Term Call

Long calls are when options traders purchase call options to leverage their trades and take advantage of rising prices. Long calls can be used by traders who are bullish or confident about a stock, index or exchange-traded funds. They purchase a call option to purchase it at a fixed price to ensure that if the price rises, they will still be obligated to purchase it at the earlier price. They can then sell the security at a higher price using their call option. A long call is a way for traders to maximize their earnings and reduce the risk of buying a stock directly.

2. Longer Put

A long put strategy, on the other hand is a strategy that sells short-selling options. If traders have a negative sentiment about a stock, index, or exchange traded fund, long puts are a great option. Here, traders wait for the prices to fall in order to take advantage of their leverage options. The trader can take advantage of falling prices by selling their contracts at a lower price than the previous price. Although the security might be trading at a lower price than an options contract, one must sell their security when the contract matures to earn returns.

3. Covered call

Covered calls are the third option strategy. They are the best strategy for people who take lower risks and want to maximize their earnings potential in return for maximum protection in the event of an unexpected stock performance. If they choose the covered call strategy, one can expect a slight to minimal increase in the price of the security. This involves purchasing around 100 shares of the underlying asset and then selling a call option to all those shares. The premium is paid to the trader upon selling the call. This lowers the cost basis of the shares purchased and gives them a cushion against a stock that is underperforming.

Reward vs Risk with Options Trading

Each option strategy has its own risks and rewards. Each strategy has a risk that the stock market will move in an opposite direction to what was expected, or even not at all. To protect their positions, some traders prefer to use a covered call strategy as a downside protection option. Some strategies, such as the long call or long put, offer higher returns than covered call options strategies. You can choose the best options strategies for you based on your investment goals and risk appetite.

Conclusion

There are many other strategies available, including the protected put, married put and long straddle. They all use the same core principle of being able to purchase or sell security in the future at any time and leveraging that opportunity.