• Trade options are an amazing way to diversify your investment strategy, hedge against risks, and generate higher returns on your investment. While trade options may seem intimidating at first, with the right knowledge and tools, such as a user-friendly trading platform, even beginners can easily start their trading journey. The following blog will walk you through all the basics of options trading, the techniques, the risks involved, and how to start your trading journey.  

What are trade options? 

• Trade options are commonly known as options trading and consist of purchasing and selling contracts called “options” that provide the holder the right but not the obligation to purchase or even sell an underlying asset like stocks, commodities, indexes, ETFs, at a predetermined price within a specific time frame. There are mainly two types of options: 

• Call options- Provide the buyer the right to purchase the underlying asset.  

• Put options– Provide the buyer with the right to sell the underlying asset.  

How do trade options work? 

• Trade options work by providing buyers the right but not the obligation to purchase or sell options, which are underlying assets at a certain strike price within a set period. Sellers of these options can take on the obligation to fulfill the contract if the buyer opts to exercise the options. Here is how trade options work: 

Components of an option  

• Strike price– It refers to the agreed-upon price at which the asset can be purchased or sold.  

• Expiration date– It refers to the last date on which the option can be exercised 

• Premium– It refers to the price paid by the buyer to the seller for the option contract.  

Exercising and settlement  

• If the market price is considered to be favorable, that is above the strike for calls, and below for puts, then the buyer may exercise the option for a profit. If not, then the buyer will let the option expire and will lose only the premium amount it paid.  

Profit and loss 

• Call option example- If a buyer purchases a call with a $50 strike for a $5 premium and the stock increases to $60, then the profit will be (60-50) = $5 per share (excluding commissions).  

• Put option example– If you purchase a put with a $70 strike for a $7 premium and then the stock falls to $55, then your profit will be (70-55) = $8 per share.  

• The maximum loss for buyers is the premium they paid. However, when it comes to sellers, they face much larger losses if the market is moving against them.  

Time value and decay  

• Options lose value as they slowly approach expiration; this phenomenon is known as “time decay” or “theta”. The closer to expiry, the less time there will be for the underlying asset to move favorably, which decreases the value of an option. Furthermore, the price of the option contains an intrinsic value (the value if exercised immediately) and time value (extra value on the basis of time left and volatility).  

Types of trade options strategies for beginners 

Long call 

• In this strategy, purchasing a call option gives the buyer the right to buy an underlying asset at a set price. This strategy can be used when the buyer expects that the price of the asset will increase. Lastly, the maximum loss in a long call is the premium paid; potential profit is considered to be unlimited if the assets rise sharply.  

Covered call  

• In this strategy, a call option is sold on the asset that is already owned by the owner. It can be used when the trader expects that the asset’s price will remain the same or will rise slightly. A covered call produces income from the premium, but caps upside potential. The trader will have to sell the asset if the option is exercised.  

Protective put 

• In this strategy, a put option is purchased while also holding the underlying asset. This strategy is used when the traders want to protect against a potential decline in the price of the asset. Protective put also limits downside risks while allowing for upside gains.  

Long put  

• Purchasing a put option provides the trader with the right to sell the underlying asset at a set price. It can be used when the price of an asset is expected to fall. Furthermore, in this strategy, the maximum loss is the premium paid; the potential profit is substantial if the price of the asset drops.  

How to get started with trade options 

Evaluate your readiness 

• Before starting out with trade options, assess your financial health, risk tolerance, and understanding of the options. Options can usually be complex and risky, so make sure you have a solid grasp of market trends and basic trading concepts before moving ahead.  

Learn the basics 

• You need to understand the four basic actions: purchasing calls, selling calls, buying puts, and selling puts. Understand the difference between being an options holder that is a buyer and a writer (seller), as risk profiles vary significantly. You can start out with simple strategies such as long calls, covered calls, and cash-secured puts.  

Create a trading plan and strategy 

• Define all your objectives, like heading speculation, and income. Select an option strategy that matches your market outlook as well as risk appetite. If you are just starting out, it will be best to stick to straightforward strategies.  

Common mistakes to avoid  

Trading without a clear strategy  

• Entering trades without a defined plan or exit strategy is a major error on your part. You need to understand your objectives, risk tolerance, and criteria for entering and exiting trades.  

Ignoring the basics  

• Not understanding the fundamental options concepts, such as Greeks, time decay, as well as volatility, will lead to poor decision-making. You need to take time to learn how options are priced and how their value is impacted by different factors.  

Not diversifying  

• If you fail to diversify or concentrate all your capital in a single trade or strategy, then it will increase your risk. You need to diversify across different strategies and underlying assets to decrease the impact of any one loss.  

Overleveraging and poor position sizing  

• Taking positions that are too large relative to the size of your account can increase your losses. You need to manage your risk by sizing your trades appropriately and not risking too much in a single position.  

Conclusion 

• Now that you understand the basics of how to trade options, you are ready to enter the trading world. Remember, trade options are not about making quick money, rather understanding strategies, managing risk, and regularly improving your trading knowledge. If you are searching for a reliable and intuitive trading platform, then Thaurus is an excellent choice. With its advanced trading tools, risk management calculators, interactive learning modules, and real-time market data, you can understand the basics of trading and refine your skills. Thaurus creates a secure trading atmosphere required to trade options with confidence.  

• Contact us, and our team will get back to you in 24 hours.