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Beginner's Guide to 6 Popular Options Trading Strategies

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The derivatives area of the Indian financial markets is one of the most popular among investors for a variety of reasons. Contracts whose value is derived from the value of an underlying security or asset are known as derivatives .

Futures and options are the two standardised derivative instruments traded in India. An investor can use options to buy or sell a specific investment or asset at a predetermined price for a specific length of time. The underlying security could be a stock, a commodity, or even an index. Options are preferred by investors since they just have to pay a small premium to trade-in options.

Options are more harder to understand than standard equities and require extensive research and experience. There are a few strategies that, when used correctly, can help you trade options more efficiently. For newbies, these strategies are legal and simple to implement.

Let's have a look at some of the most popular option trading strategies to see whether one is right for you.

1. Long-distance options

This strategy requires buying calls and is best suited to investors who are confident in the price of the underlying stock or asset class. This strategy allows you to profit from the rising price of the underlying asset. This strategy also lowers overall risk while trading options. When adopting this strategy, you are just risking your premium, but the potential gain based on the underlying asset's rise might be endless.

2. Options for Long Puts

In the same way that the Long Call strategy necessitates the purchase of Put Options, this approach necessitates the purchase of Put Options. The primary distinction is that in this case, the price of the underlying security or asset should fall. Your risk is limited to the amount of premium you paid if the asset's value rises above the strike price. Long-put strategies are widely used by investors to profit from falling stock prices.

3. Options for Short-Term Puts

This is a tactic that option sellers should employ. The purpose of a short pit strategy is to profit on the premium paid by other investors. When an option seller sells an option to an investor and the price of the underlying asset rises or stays the same, the option seller is allowed to keep the premium, resulting in a profit from the deal when using the short put strategy.

4. Options for Covered Calls

This strategy is common among investors who want to make money from a business they own but don't see a significant price shift. This strategy involves investors owning a stock and selling a call option on that stock as the underlying asset. As a result, you will receive a higher salary. If prices do not fluctuate and remain unchanged in this case, the option buyer will let the contract expire. Once the transaction has expired, you will be allowed to keep the premium money and benefit from it.

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5. Put Options for Married Couples

This strategy necessitates the use of the derivatives market's futures and options segments. While simultaneously investing in stocks and options, the investor purchases a put option contract for every few shares purchased. The put option will protect your stock investment if the stock market falls in value. This method's purpose is to protect your money against falling stock prices. This strategy can be difficult to implement, but when done correctly, it can help offset portfolio losses while investors wait for stock prices to rise.

6. Put Options with a Safety Net

As the name implies, this method is advised for investors who want to protect themselves from losses. This strategy necessitates the acquisition of a long-put option on an existing asset. If the asset's price falls over time, you'll be protected. The primary difference between this and the married put strategy is that a protective put is intended to mitigate losses from an existing asset, whereas a married put protects an asset purchased at the same time.