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The trick is not to overcomplicate things in the beginning.
These seven options strategies are easy to understand, simple to execute and a great way to learn the ropes as a beginner.
The costs, tools and platform you need to trade options effectively.
- $0 stock, ETF and options trade fees, with no options contract fees.
- Access low margin rates and up to $50,000 in instant deposits with Robinhood Gold.
- Trade options in a tax-advantaged Robinhood IRA and earn a 1% contribution match.
- Earn 4% interest on your uninvested cash with Robinhood Gold.
Options trading strategies to know as a beginner
We’ve selected the following strategies due to their ease of use.
Five are quite straightforward, requiring you to buy or sell just one option contract.(2) The remaining two require purchasing and selling options at the same time.
Covered call
A covered call involves selling a call option on a stock you already own. When you sell a call, you collect a premium — allowing you to generate additional gains. If the stock’s price remains below the strike price, you keep both your shares and the premium received.
- Generates income through premiums
- Offers some downside protection
- Potential to enhance returns
- Limited upside potential
- Obligation to sell your shares
- Requires stock ownership
How to execute a covered call strategy
- Select a stock you own. Choose a stock in your portfolio that you are willing to sell if the call is exercised. Alternatively, if you have the funds, you can purchase the stock — and you’ll need 100 shares, as an option contract covers 100 shares.(3)
- Check the option chain. Review the available options for the stock and compare them to determine suitable premiums and strike prices.
- Choose the strike price and expiration date. Select a strike price at which you are comfortable selling the stock and an expiration date that fits your investment timeline.
- Sell the call option. Enter an order to sell the call option through your brokerage platform.
- Monitor your position. Keep an eye on the stock price and the option’s status as expiration approaches or if significant price swings in the underlying asset occur.
- Decide on next steps. If the option is exercised, you’ll sell your shares at the strike price. If not, you’ve profited from the premiums collected and can consider selling another call option.
Cash-secured put
A cash-secured put involves selling a put option while holding enough cash to buy the stock if the option is exercised.(4) Just like with a covered call, with a cash-secured put, the premium provides additional income — and the put could provide an opportunity to purchase the stock at a lower price.(5)
- Generates income through premiums
- Potential to buy stocks at a lower price
- Downside protection from premiums
- Capital requirement to cover the stock’s potential purchase
- Potential losses if you must buy the stock at a higher price
- Limited profit potential
How to execute a cash-secured put strategy
- Select a stock you want to own. This is a stock that you would be willing to buy if the option is exercised.
- Check the option chain. Look at the available options for the stock and evaluate potential premiums and strike prices.
- Choose the strike price and expiration date. Select a strike price at which you are comfortable buying the stock and an expiration date that fits your investment timeline.
- Calculate required cash. Before moving on, make sure you have enough cash in your account to cover the stock’s purchase at the strike price.
- Sell the put option. Enter an order to sell the put option through your brokerage platform.
- Monitor your position. Track the stock’s price and the option’s status as expiration approaches.
- Decide on next steps. If the option is exercised, you’ll purchase the stock at the strike price. If not, you can consider selling another put option.
Long call
A long call is an options trading strategy where you buy a call option, giving you the right to purchase a stock at a predetermined price within a specific time frame.(6) If the stock’s price exceeds the strike price, you can buy it at the lower price and potentially sell it for a profit.
- Potential for significant profit if the stock price rises
- Risk is limited to the premium paid for the call option
- Affordable initial investment
- Can sell the option at any time before expiration to realize gains or cut losses
- The call option’s value decreases as it approaches expiration — a phenomenon referred to as time decay
- The option can expire worthless
- High volatility can increase the option’s price
How to execute a long call strategy
- Select a stock you expect to rise. Identify a stock that has the potential for a price increase.
- Check the option chain. Look at available call options for the stock.
- Choose the strike price and expiration date. Select a strike price and expiration that align with your expectations. Factor in your previous analysis and adjust both the strike price and expiration date accordingly.
- Determine your budget. Calculate the total cost based on the premium and number of contracts.
- Buy the call option. Execute the purchase through your brokerage platform.
- Monitor your position. Keep an eye on stock performance and option value — and keep an increasingly closer watch as the expiration date approaches.
- Decide on next steps. You can sell the option to lock in gains, exercise it to purchase shares if you have enough money or if things don’t pan out, you can simply let the options expire worthless.
Long put
A long put is an options trading strategy in which you buy a put option, giving you the right to sell a stock at a predetermined price within a specific time frame. If the stock’s price falls below the strike price, you can sell it at the higher price to realize a profit.
- Potential for significant profit if the stock price declines
- Risk is limited to the premium paid for the put option
- Acts as a hedge against long stock positions
- The put option’s value decreases as it approaches expiration
- Total loss of premium if the stock price doesn’t decline
- Volatility risk can increase the option’s price
How to execute a long put strategy
- Select a stock you expect to decline. Choose a stock you believe will decrease in price.
- Check the option chain. Look at available put options for the stock.
- Choose the strike price and expiration date. Select a strike price and expiration that align with your expectations.
- Determine your budget. Calculate the total cost based on the premium and number of contracts.
- Buy the put option. Execute the purchase through your brokerage platform.
- Monitor your position. Keep an eye on stock performance and option value.
- Decide on the next steps. Sell the option, exercise the option, or let it expire worthless.
Protective put
A protective put is an options strategy where you buy a put option on a stock you already own to hedge against potential losses. If the stock’s price declines, the put option provides a safety net by allowing you to sell at the strike price, thereby limiting your losses.
- Provides downside protection while allowing for upside potential
- Limits potential losses to the strike price minus the premium paid
- Peace of mind during volatile market conditions
- Flexibility to sell the put for a profit if the stock declines
- Premium costs can reduce overall profit
- Limited upside profit due to the cost of the put
- May lead to over-hedging and unnecessary costs
- Requires active management and monitoring
How to execute a protective put strategy
- Select a stock you own. Choose a stock you hold in your portfolio.
- Check the option chain. Look at available put options for the stock.
- Choose the strike price and expiration date. Select a strike price and expiration that offer suitable protection.
- Calculate the required premium. Determine the cost of purchasing the put option.
- Buy the put option. Place the trade through your brokerage platform.
- Monitor your position. Keep an eye on stock performance and option value.
- Decide on next steps. Sell the option, exercise the option or let it expire worthless.
Bull call spread
A bull call spread is an options strategy where you buy a call option at a lower strike price and sell another call option at a higher strike price with the same expiration date. You profit if the stock price rises above the lower strike price, but your gains are capped at the higher strike price.
- Reduces the cost of entering a long call position.
- Limits potential losses
- Provides a defined risk-reward profile
- Suitable for moderate bullish outlooks
- Profit is capped at the difference between the strike prices of the two call options minus the net premium paid
- Managing and understanding spreads can be complex
- Requires precise timing to maximize profits
- Limited profit potential when compared to strategies such as long calls
How to execute a bull call spread strategy
- Select a stock you expect to rise moderately. Choose a stock you believe will increase in price.
- Check the option chain. Look at available call options for the stock.
- Choose the strike price and expiration date. Select two strike prices and an expiration that aligns with your expectations.
- Determine your budget. Calculate the total cost based on the premiums and number of contracts.
- Buy the lower strike call option. Execute the purchase through your brokerage platform.
- Sell the higher strike call option. Execute the sale through your brokerage platform.
- Monitor your position. Keep an eye on stock performance and option values.
- Decide on next steps. Close both positions, exercise or let them expire.
Bear put spread
A bear put spread is an options strategy where you buy a put option at a higher strike price and sell another put option at a lower strike price with the same expiration date. You profit if the stock price falls below the higher strike price, but your gains are capped at the lower strike price.
- Generates income through premiums
- Limits potential losses by buying a lower strike price put option
- Provides clear risk-reward parameters
- Effective for a moderately bearish market outlook
- Profit is capped at the difference between the strike prices of the two put options minus the net premium paid
- Managing and understanding spreads can be complex
- Success relies on precise market timing
How to execute a bear put spread strategy
- Select a stock you expect to decline. Choose a stock you believe will decrease in price.
- Check the option chain. Look at available put options for the stock.
- Choose the strike price and expiration date. Select two strike prices and an expiration that aligns with your expectations.
- Determine your budget and potential income. Calculate the total cost based on the premiums and number of contracts.
- Buy the higher strike put option. Execute the purchase through your brokerage platform.
- Sell the lower strike put option. Execute the sale through your brokerage platform.
- Monitor your position. Keep an eye on stock performance and option values.
- Decide on next steps. Close both positions, exercise or let them expire.
Tips for successful options trading
Finding a strategy you can reliably execute is important — but it’s also a matter of trial and error and finding what works for you. Now, let’s take a step back and look at some general advice that applies to all traders regardless of their approach.
- Importance of research. Always make sure to thoroughly research the underlying stock and market conditions before placing an options trade. No matter which strategy you choose, you’re trying to predict future price action — brush up on technical analysis to make informed trades.
- Risk management. You should have a risk management plan in place. Limit potential losses by always setting stop-loss orders and diversifying your trades. Stick to trades that have an acceptable risk-to-reward ratio, and don’t commit more than 2% of your account’s value to any one single trade.
- Starting small. Begin with small positions to minimize risks while you learn the intricacies of options trading. Gradually increase your exposure as you gain experience and figure out which options trading strategies are a good fit for you. Remember — you’re running a marathon, not a sprint.
- Journal and keep track of your trades. You should meticulously keep track of your trades — entry points, win/loss ratios, stop losses and other important details should be written down. There are various free trading journal templates online — besides that, the only thing you need is a run-of-the-mill PDF editor and a bit of discipline.
Common mistakes to avoid
You should also take care to avoid several common pitfalls. This will require conscious effort — most mistakes in options trading arise either because of a lapse in focus or following your gut without properly considering all relevant factors.
- Overtrading. Trading too frequently can lead to higher transaction costs and increased risk. Focus on quality trades over quantity. While the exact costs of trading will vary from brokerage to brokerage, high-frequency trading is generally not suitable for beginners and should be avoided.
- Ignoring risk management. Options, like other derivatives, are risky investments. Keep this fact in mind, as failing to set stop-loss orders or manage risk properly can result in significant losses.
- Lack of strategy. Trading without a clear plan or strategy often leads to inconsistent results. Develop and stick to a well-defined trading plan. This won’t just make things simpler or more streamlined — it allows you to identify what works, what doesn’t and what can be improved.
- Emotional trading: Making decisions based on emotions rather than logic is usually detrimental. It’s difficult to keep completely cool when money is on the line — but being aware of emotional biases can allow you to avoid costly, irrational mistakes.
Bottom line
Incorporating options trading into your repertoire can be immensely rewarding — but there’s plenty of risk involved.
With something as complex as derivatives, starting slow is the best course of action — and these seven options trading strategies for beginners are the simplest way to dip your toe in the water in a straightforward, manageable way to gain experience.
If you’re ready to put these strategies into practice, check out our best brokerage account picks to find the right platform for you.
Frequently asked questions
Which option strategy is best for beginners?
Although all the options trading strategies we’ve discussed are suitable for beginners, one of them stands out — long calls. In short, with long calls, your maximum losses are equal to the premium or price of the options contract. Plus, the strategy is quite simple — both in theory and practice.
What is the most profitable way to trade options?
A strategy that you have experience with and that matches your risk preference is always the way to go — however, in general, long calls and puts provide the biggest potential for profit, provided that you time them correctly.
How do beginners trade options successfully?
To maximize the chance of success, beginners should start with simple options trading strategies, pay extra attention to risk management, and, where possible, start with a paper trading account before placing real trades.
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