- Top 3 Options Trading Strategies for Beginners
- Option Spreads
- Vertical, Horizontal & Diagonal Spreads
- Bull & Bear Spreads
- Credit & Debit Spreads
- Recent Stories
- More Options Strategies
- You May Also Like
- Continue Reading...
- Buying Straddles into Earnings
- Writing Puts to Purchase Stocks
- What are Binary Options and How to Trade Them?
- Investing in Growth Stocks using LEAPSÂ® options
- Effect of Dividends on Option Pricing
- Bull Call Spread: An Alternative to the Covered Call
- Dividend Capture using Covered Calls
- Leverage using Calls, Not Margin Calls
- Day Trading using Options
- What is the Put Call Ratio and How to Use It
- Understanding Put-Call Parity
- Understanding the Greeks
- Valuing Common Stock using Discounted Cash Flow Analysis
Top 3 Options Trading Strategies for Beginners
In options trading, an option spread is created by the simultaneous purchase and sale of options of the same class on the same underlying security but with different strike prices and/or expiration dates.
Any spread that is constructed using calls can be refered to as a call spread. Similarly, put spreads are spreads created using put options.
Option buyers can consider using spreads to reduce the net cost of entering a trade.
Naked option sellers can use spreads instead to lower margin requirements so as to free up buying power while simultaneously putting a cap on the maximum loss potential.
Vertical, Horizontal & Diagonal Spreads
The three basic classes of spreads are the vertical spread, the horizontal spread and the diagonal spread.
They are categorized by the relationships between the strike price and expiration dates of the options involved.
Vertical spreads are constructed using options of the same class, same underlying security, same expiration month, but at different strike prices.
Horizontal or calendar spreads are constructed using options of the same underlying security, same strike prices but with different expiration dates.
Diagonal spreads are created using options of the same underlying security but different strike prices and expiration dates.
Bull & Bear Spreads
If an option spread is designed to profit from a rise in the price of the underlying security, it is a bull spread.
Conversely, a bear spread is a spread where favorable outcome is attained when the price of the underlying security goes down.
Credit & Debit Spreads
Option spreads can be entered on a net credit or a net debit.
If the premiums of the options sold is higher than the premiums of the options purchased, then a net credit is received when entering the spread. If the opposite is true, then a debit is taken.
Spreads that are entered on a debit are known as debit spreads while those entered on a credit are known as credit spreads.
More Options Strategies
Altogether, there are quite a number of options trading strategies available to the investor and many of them come with exotic names.
Here in this website, we have tutorials covering all known strategies and we have classified them under bullish strategies, bearish strategies and neutral (non-directional) strategies.
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Buying Straddles into Earnings
Buying straddles is a great way to play earnings.
Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results....[Read on...]
Writing Puts to Purchase Stocks
If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount....[Read on...]
What are Binary Options and How to Trade Them?
Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time.....[Read on...]
Investing in Growth Stocks using LEAPSÂ® options
If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPSÂ® and why I consider them to be a great option for investing in the next MicrosoftÂ®....
Effect of Dividends on Option Pricing
Cash dividends issued by stocks have big impact on their option prices.
This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date....[Read on...]
Bull Call Spread: An Alternative to the Covered Call
As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative....[Read on...]
Dividend Capture using Covered Calls
Some stocks pay generous dividends every quarter.
You qualify for the dividend if you are holding on the shares before the ex-dividend date....[Read on...]
Leverage using Calls, Not Margin Calls
To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk.
A most common way to do that is to buy stocks on margin....[Read on...]
Day Trading using Options
Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading....
What is the Put Call Ratio and How to Use It
Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator.... [Read on...]
Understanding Put-Call Parity
Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969.
It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa.... [Read on...]
Understanding the Greeks
In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions.
They are known as "the greeks"....
Valuing Common Stock using Discounted Cash Flow Analysis
Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow....