When it comes to trading options, you need to know a few key things to be successful. Firstly, trading options is not as simple as buying and selling stocks – there is a lot more risk involved, so you need to be aware of the risks before getting started.
Secondly, options can be used in several different ways, so it’s essential to understand the available strategies and how they can benefit your portfolio. In this article, we will look at five of the best options trading strategies for Australian traders.
The Bull Call Spread
The bull call spread is one of the most popular options trading strategies, and it is perfect for novice traders. This strategy involves buying a call option and selling a higher strike call option with the same expiration date. This strategy is used when you expect the stock to rise in price, but you do not want to risk buying the stock outright.
The Covered Call
The covered call is another popular option trading strategy, and it is perfect for novice traders who want to generate income from their stocks. This strategy involves buying a stock and then selling a call option on that same stock. This strategy is used when you expect the stock to stay relatively flat or rise slightly in price.
The Protective Put
The protective put is another options trading strategy perfect for novice traders. This strategy involves buying a put option on a stock you already own. This strategy is used when you are worried about the possibility of the stock price falling.
The Long Straddle
The long straddle is an options trading strategy that is perfect for novice traders looking to profit from volatile markets. This strategy involves buying a call option and a put option with the same expiration date and strike price.
The Long Strangle
The long strangle is another options trading strategy that is perfect for novice traders looking to profit from volatile markets. This strategy involves buying a call option and a put option with the same expiration date but different strike prices.
Benefits of Using Options Trading Strategy
Whilst several strategies can be used when trading options, the long call and covered call strategies are two of the most popular and most straightforward strategies for novice traders to use. These strategies offer limited downside risk and unlimited upside potential, making them ideal for newcomers to the options market.
The Risks Associated with Trading Options
The main risk associated with trading options for Australian novice traders is leveraged exposure. This means that you can lose more money than you invest, so it’s important to only trade with money you can afford to lose. Additionally, because options are derivative products, their value can rise and fall quickly, so it’s essential to be aware of the current market conditions before making any trades.
Despite these risks, options can be a powerful tool for traders who understand how to use them. For example, by using a ‘spread trade’, you can protect your portfolio against large fluctuations in the market. Alternatively, by using a ‘straddle trade’, you can profit from volatility in the market.
Before starting to trade options, it’s important to research and understand the risks involved, and with a little bit of practice and patience, you can use options trading strategies to help you achieve your financial goals. Options trading can be an excellent way for novice traders to get started in the market. By employing simple and effective strategies, such as the long call or covered call, new traders can limit their downside risk whilst still having the potential to make profitable trades.