Some Trading Strategy for the Novice
One of the things that you will know about options is that it is a type of derivative contract that give the buyers of the contracts [i.e., the option holders] the right [but not the responsibility] to purchase or sell a security at a selected price at some point of time in future. Another thing, you will know about the option buyers are that they are charged with an amount called premium by the sellers for such a right. If the market costs are not favorable then for the option holders, then they (option holders) will let the option expire without exercising the rights. Thus, they ensure that the possible losses are not high than the premium. Next, if the market moves in the channel that makes this right more valuable then it makes use or sense.
Two Types of Contracts –
There is also Options strategy that is available on good sites which you can check and switch to. Options are mostly divided into 2 types of contracts – one is Call Contracts and the other is Put Contracts. In a call contract or call option, the purchaser of the contract buys the right to purchase the underlying asset in the future. It will be done at a predetermined price, called the exercise price or a strike price. In a put option or a put contract, the buyer gets the right to sell the underlying assets at a predetermined price in the future. Let us take a look at some of the basic strategies that a novice investor can use with a call or put contracts or options to limit their risk. The first two comprise of using options or alternatives to place a direction bet with a downside that is limited if the bet goes wrong.
Making a Bet in the Market –
Other strategies that are involved are the hedging strategies that are laid on top of the existing positions. Let’s look at the buying calls or long calls. There are some benefits of trading options for those people seeing to make a directional bet in the market. If you feel that cost of the asset will rise then you can purchase a call option by using less capital compared to the assets themselves. In addition, if the price falls, then your loss will be limited to the premium that is paid for the options and nothing more. This can be a preferred strategy for the traders who are confident or bullish about a specific exchange-traded fund, stock, or index fund, and want to limit the risk.
Leverage Instruments –
You can also use the leverage to take the benefit of the rising prices. One of the most essentially leveraged instruments that permit the traders to increase the possible upside advantage by using small amounts compared to trading the underlying assets is Options. So, instead of laying out $20,000 to purchase 200 shares of a $200 stock, you could or can hypothetically spend say, $3,000 or $2500 on a call contract with a strike price i.e., 10% or 15% higher compared to the present market price.
The trader’s possible loss from a long call is restricted to the premium paid. The possible profit is unlimited because the option payoff will enhance along with the underlying asset price until it is expired and there are no limitations theoretically as to how high it can go.