**What Is The Best Option Trading Strategy** – Options are a type of derivative contract that gives the buyers of the contracts (option holders) the right (but not the obligation) to buy or sell a security at a selected price at some point in the future. Buyers of options are charged an amount called a premium by the sellers for such a right. If market prices are unfavorable for option holders, they will let the option expire and not exercise this right, ensuring that potential losses will not exceed the premium. On the other hand, if the market moves in the direction that makes this right more valuable, he uses it.

Options are generally divided into “call” and “put” contracts. With a call option, the buyer of the contract buys the right to

## What Is The Best Option Trading Strategy

The underlying asset in the future at a predetermined price, known as the exercise price or strike price. With an aput option, the buyer gets the right to

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Let’s look at some basic strategies that a beginner investor can use with calls or puts to limit their risk. The first two involve using options to place a directional bet with a limited downside if the bet goes wrong. The others involve hedging strategies that are set on existing positions.

Trading options has several advantages for those looking to make a directional bet in the market. If you think the price of an asset will rise, you can buy a call option using less capital than the asset itself. At the same time, if the price falls instead, your losses will be limited to the premium paid for the options and no more. This could be a preferred strategy for traders:

Essentially, options are instruments of leverage in that they allow traders to increase their potential upside by using smaller amounts than would be required if the underlying asset itself were traded . So, instead of laying out $10,000 to buy 100 shares of a $100 stock, you could hypothetically spend $2,000 on, say, a call contract with a strike price 10% higher than the current market price.

Suppose traders want to invest $5,000 in Apple (AAPL), trading at around $165 per share. With this amount, they can buy 30 shares for $4,950. Suppose then that the stock price rises 10% to $181.50 in the next month. Ignoring any brokerage commission or transaction fees, the trader’s portfolio will increase to $5,445, leaving the trader with a net dollar return of $495, or 10% on the invested capital.

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Now, let’s say a call option on the stock with a strike price of $165 that expires about a month from now costs $5.50 per share or $550 per contract. Given the trader’s available investment budget, they can buy nine options at a cost of $4,950. Because the option controls 100 shares, the trader is effectively trading 900 shares. If the stock price rises 10% to $181.50 at expiration, the option will expire in the money (ITM) and be worth $16.50 per share (for a strike of $181.50 to $165), or $14,850 for 900 shares. That’s a net dollar return of $9,990, or 200% on the capital invested, a far greater return compared to trading the underlying asset directly.

The trader’s potential loss from a long call is limited to the premium paid. Potential profit is unlimited because the option payout will increase along with the underlying asset price until expiration, and in theory there is no limit to how high it can go.

If a call option gives the holder the right to buy the underlying at a set price before the contract expires, a put option gives the holder the right

A put option effectively works in the exact opposite direction to the way a call option does, and the put option gains value as the price of the underlying option declines. While short selling allows a trader to profit from falling prices, the risk with a short position is infinite because there is theoretically no limit to how high a price can rise. With a put option, if the underlying ends up being higher than the option’s strike price, the option will simply expire.

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Say you think a stock’s price is likely to drop from $60 to $50 or lower based on poor earnings, but you don’t want to risk selling the stock short in case you’re wrong. Instead, you can buy the $50 for a $2.00 premium. If the stock does not fall below $50, or indeed rises, the most you will lose is the $2.00 premium.

However, if you are right and the stock falls all the way to $45, you would make $3 ($50 minus $45. minus the $2 premium).

The potential loss on a long put is limited to the premium paid for the options. The maximum profit from the position is limited by the fact that the underlying price cannot fall below zero, but as with a long call option, the put option leverages the trader’s profit.

Unlike the put or long put, a covered call is a strategy that overlays a long position in the underlying asset. It is essentially an upside call sold in an amount that would cover the amount of that current position. This way, the covered call writer collects the option premium as income, but also limits the upside potential of the underlying position. This is an option for traders:

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A covered call strategy involves buying 100 shares of the underlying asset and selling a call option against those shares. When the trader sells the call, the option premium is collected, lowering the cost basis on the shares and providing some downside protection. Alternatively, by selling the option, the trader is agreeing to sell shares of the underlying at the strike price of the option, which limits the trader’s upside potential.

Suppose a trader buys 1,000 shares of BP (BP) at $44 per share and simultaneously writes 10 call options (one contract for every 100 shares) with a strike price of $46 expiring in one month, at a cost of $0.25 per share, or $25 per share. contract and a total of $250 for the 10 contracts. The $0.25 premium reduces the cost basis on the shares to $43.75, so any reduction in basis down to this point will be offset by the premium received from the option position, which offers limited downside protection.

If the share price rises above $46 before expiration, the short call option will be exercised (or “called away”), meaning the trader will have to deliver the stock at the option’s strike price. In this case, the trader will make a profit of $2.25 per share ($46 strike price – $43.75 cost basis).

However, this example suggests that the trader does not expect BP to move above $46 or significantly below $44 in the next month. As long as the shares do not rise above $46 and are called away before the options expire, the trader will keep the premium free and clear and can continue to sell calls against the shares if he wishes .

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If the share price rises above the strike price before expiry, the short call option can be exercised and the trader will have to deliver shares of the underlying price at the strike price of the option, even if it is below the market price. As an alternative to this risk, a covered call strategy provides limited downside protection in the form of the premium received when selling the call option.

A defensive move involves buying a downside in an amount to cover an existing position in the underlying asset. In fact, this strategy provides a lower floor below which you can no longer lose. Of course, you will have to pay for the option premium. In this way, it acts as a kind of insurance policy against loss. This is a preferred strategy for traders who own the underlying asset and need downside protection

Therefore, a defensive measure, like the strategy we discussed above, is a long shot; However, the goal, as the name suggests, is to protect below against an attempt to profit from a downside move. If a trader has shares with a long-term bullish sentiment but wants to protect against a short-term decline, he can buy a defensive one.

If the underlying price increases and is above the maturity of the strike price, the option expires worthless and the trader loses the premium but still benefits from the increased underlying price. On the other hand, if the underlying price falls, the trader’s portfolio position loses value, but this loss is largely covered by the gain from the put option position. Therefore, the position can effectively be thought of as an insurance strategy.

### Wheel Strategy: A Long Term Strategy For Consistent Income

The trader can set the strike price below the current price to reduce premium payment at the cost of reducing downside protection. This can be thought of as an insurance deductible. Suppose, for example, that an investor buys 1,000 shares of Coca-Cola (KO) at a price of $44 and wants to protect the investment from adverse price movements over the next two months. The following add options are available:

The table shows that the cost of defense increases with that level. For example, if the

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