What are Options?
Call Options: Right to buy an asset.
Credit: Image by Sabrina Jiang © Investopedia 2022
Put Options: Right to sell an asset.
Credit: Image by Sabrina Jiang © Investopedia 2022
Benefits of Options Trading
Key Terminology
Buying Call Options
Example:
🔹 Stock XYZ trading at $50; buy a call with a $55 strike price. If stock rises above $55 before expiration, profit potential increases significantly.
Buying Put Options
Example:
🔹 Stock ABC trading at $100; buy a put with a $95 strike price. Profit occurs if the stock drops below the strike price before expiration.
Strategy 1: Covered Calls
Example:
🔹 Own 100 shares at $40/share; sell a call option at $45 strike price. Receive premium immediately, enhancing returns regardless of moderate price movements.
Strategy 2: Cash-Secured Puts
Example:
🔹 Sell a put with a strike price of $30; stock trading currently at $32. Earn premium; if stock declines to $30, purchase at a discounted price.
Strategy 3: Vertical Spreads
Example (Bull Call Spread):
🔹 Buy call option at $50 strike, sell call option at $55 strike. Profit limited but risk clearly defined, ideal in moderately bullish markets.
Strategy 4: Iron Condors
Example:
🔹 Stock trading at $100; sell call spread at $110-$115 strikes and put spread at $90-$85 strikes. Profitable as long as stock remains between $90 and $110.
Example:
🔹 Buy call and put options both at $50 strike price. Profit if stock significantly moves up or down.
Importance of Managing Risk
Risk Management Techniques
Practical Example:
🔹 If maximum acceptable loss per trade is $200, limit the premium paid or risk per trade accordingly.
Frequent Mistakes
Solutions
Why Psychology Matters
Effective Psychological Strategies
Example 1: Covered Call Income
Example 2: Vertical Spread for Limited Risk
Congratulations! You’ve mastered simplified yet highly effective strategies to achieve consistent results in options trading. Implementing these straightforward approaches and maintaining disciplined risk management practices can help you build long-term trading confidence and consistency.
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Disclaimer: The information and tools provided by Sky Links Capital are strictly for educational and informational purposes only. They do not constitute financial advice, investment recommendations, or an offer to buy or sell any financial instruments. Users should make independent decisions based on their own research and, where appropriate, seek professional advice.
