Stock Market Investing for Beginners: Complete Guide to the Stock Market with Strategies for Income Generation from ETF, Day Trading, Options, Futures, ... and More (Trading Academy Book 2) by Mark Robert Rich

Author:Mark Robert Rich [Rich, Mark Robert]
Language: eng
Format: epub
Published: 2020-05-11T00:00:00+00:00

Investment Strategies for Trading Stock Options

The long put and long call strategies are tried and true when it comes to option trading but they are not the only effective or popular strategies that options traders use. Other options trading strategies include:

Covered Call Strategy

This options trading strategy is also known as a buy write because it describes the act of selling the right to purchase a security that is owned by the investor at the strike price within a specific amount of time. This is a two-part strategy that involves the investor first purchasing a security such as stock then selling it to options traders. Stock is the most common type of security used in the covered call strategy.

The seller of the options not only benefits from owning an asset of value but also receives premium payments from options trader. Risk is significantly lowered because the investor already owns the associated security. As a result, the seller is covered if the stock price does go above the strike price. All the seller has to do is deliver the security to the holder of the option if the holder chooses to exercise that right.

If someone owns securities and chooses to use the covered call strategy to sell options, he or she needs to be comfortable with the fact that he or she will give up ownership of that security if the price increases on the market. This person needs to also be comfortable owning that security if the price depreciates. Therefore, careful consideration needs to go into the purchase of the stock or other security type when using the covered call options strategy is on the table.

In fact, the covered call strategy can play out in one of three ways. They are:

The stock goes above the strike price and the holder exercises the right, thereby earning the trader the maximum profit on the transaction. The seller benefits from the premium payment.

The stock price goes down and makes the options worthless. The seller still benefits from the premium payment.

The stock does not change or goes up slightly, which makes the options worthless. The seller still benefits from the premium payment.

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