Options are contracts that give you the right to buy or sell an underlying asset at a set price on or before an expiration date. Investors who know how to properly use options can reap many benefits. That’s why traders in the UK should follow these trading strategies and tips.
Learn How Options Work
There are two different options:
- A call option is when you have the right to buy an underlying asset at a set price on or before its expiration date. When you buy a call option, you usually anticipate the price of a stock will rise.
- A put option is when you have the right to sell an underlying asset at a set price on or before its expiration date. When you buy a put option, you expect the price of a stock to fall.
Although you have the option to exercise your rights to buy or sell, you are under no obligation to do so. Understanding the difference can help you better determine the options for you.
Create a Risk Management Strategy
When reviewing options, use “The Greeks,” which are a set of measurements that you can use to assess the risk of an options contract. They consist of:
- Delta: This refers to the change in an option’s price.
- Gamma: This measures the rate of change of delta.
- Theta: This refers to the rate of decay.
- Vega: This refers to the price value in relation to volatility.
Use these measurements to determine how much risk you’re willing to have in your options portfolio.
Build a Trading Plan
In addition to assessing, you should choose an options trading strategy, like the Straddle Strategy, which helps you lower your risk since you are betting on both sides. You would typically use the straddle strategy when you think the market is volatile but are unsure which direction a stock will go. You can make a profit with this strategy if the stock moves significantly one way, paying out more than you paid for the option.
There are two kinds of straddle strategies:
- A long straddle is when you buy a call and put option with the same expiration date and strike price.
- A short straddle is when you sell a call and put option with the same expiration date and strike price.
On the other hand, the Strangle Strategy is when you hold a position on an equal number of call and put options that have the same expiration date but different strike prices. With a long strangle, or debit spread strategy (since you have to pay to enter the trade), you purchase a put and call that is a little out of the money. With a short strangle, or credit spread strategy, you sell a put and call that is a little out of the money, and you can earn a profit from each trade’s premium.
Find a Broker You Trust
Before opening an options trading account, look for a broker who can offer you the support and guidance you need. A quality broker will be willing to discuss your options over the phone or provide you with educational materials and resources.
As you can see, there are many different strategies traders use to minimize their risk and maximize their profits. Trying out some of these strategies could benefit your options trading results.
