Options Trading
When trading stocks, a key strategy is to use options. This type of trading enables an investor to yield a greater rate of return by controlling underlying assets with a limited amount of investments. To understand how stock options trading works and to gain insight into possible strategies, review several helpful pointers.
In-the-Knows
Options provide the investor with the right to purchase stock at a predetermined price; this instrument is a derivative of the underlying asset. It is known as a “call option” when the investor has the potential to buy the stock. Conversely, if the investor has the right to sell their stock, it is known as a “put option.” Essentially, stock options can be used as a tactic to limit risk.
Buying or Selling
Options traders can decide to purchase stock directly or to buy the option and control the stock without actually purchasing it. When an option is bought and the investor anticipates the stock will gain, a call option is purchased. Conversely, when the investor believes the stock price will decline, a put option is bought.
Double Advantage
Investors can benefit from stock options trading in two distinct ways. The first advantage comes when the option is bought and the underlying stock gains in value. In this case, the investor can exercise their option, purchase the stock at the predetermined price, then sell it for the increased price. The second advantage is when the option is sold, the investor collects a premium. This transaction is dependent on whether the investor owns the underlying asset or not.
Selling Strategies
There are two types of selling strategies for options traders; these tactics are covered and uncovered. Covered selling strategies require the investor to own the underlying stock before the option is sold. Conversely, uncovered strategies do not need the investor to own the stock; but there is a greater risk than a covered strategy.
Conclusion
Overall, stock options trading can be an effective trading strategy when used properly. It is important to understand how the process works and what possible strategies are available. Additionally, it is beneficial to know advantages and selling tactics associated with options trading. By following these guidelines, the investor is better equipped to gain the most benefit while controlling risk.
UltraAlgo delivers easy to understand Options data to improve your understanding of the stock market with a little help from artificial intelligence. Combined with our industry leading trading algorithms. Our brokerage intergations include: TradeStation, ToS (ThinkorSwim), TD Ameritrade, Interactive Brokers and TradingView. Our products are designed by veteran quants with 20+ years of experience in high frequency trading for hedge funds and banks.
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