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Different Options Strategies Explained (So You Know)

This article explains the difference options strategies as well as medium level strategies


Introduction

Options trading can be an exciting way to take advantage of market opportunities, but it's also a risky venture. It's important to understand how options work before investing in them, and that's where this guide comes in! We'll cover everything from what option contracts are available to how they're priced.


You'll learn about the difference between European and American contracts and why it matters when it comes to expiration dates. There are also great resources for finding the right platform for your trades, analyzing trends in your industry or sector, and choosing strategies based on your goals. So sit back, relax—and read up so you can start making money with options trading today!


What is options trading?


Options trading gives you the right to buy or sell a particular security at a specified price within a certain period of time. The buyer of an option pays a premium for this right, and the seller receives that payment.


With stock options, you can speculate on how prices will change over time. For example, if you think XYZ company is going to do well in the next few months and its stock price will increase (or decrease), then you could buy call (or put) options on your shares of XYZ Company. If those shares go up in value during that time frame, then the call (or put) option will be worth more than its original value as well—which means that it's possible for both parties to profit from these kinds of trades!


Call vs. put options


Before we go any further, it’s important to understand that there are two types of options: calls and puts.

  • Call options give the buyer the right to buy something at a certain price by a certain date.

  • Put options give the buyer the right put something on sale at a certain price by a certain date.

How to understand American and European contracts.

  • American options can be exercised anytime before expiration.

  • European options can only be exercised on the expiration date.

  • American options can be exercised multiple times during their lifetime, while European options can only be exercised once.

How to find the right trading platform.

  • If you’re a beginner, look for a free platform that offers good educational material.

  • If you’re an experienced trader, consider paid platforms with advanced features and customizable tools.

In this section, we will go over some of the best options trading platforms available today and explain how to find one that fits your needs. The first thing to consider is how much time and money you’re willing to invest in your trading. The best platforms for beginners are free. Thinkorswim by TD Ameritrade is one of the most popular platforms among newbies and experienced traders alike. It doesn’t cost anything to use, but you will need a funded account with at least $1000 in order to get started.


There are also many educational resources available on Thinkorswim’s website that can help you learn how to trade options successfully. If you’re looking for a more advanced platform that has more tools, research and analysis options, thinkorswim is not the best choice. There are other platforms out there that offer this kind of functionality at no cost. For those who are willing to pay a monthly fee, OptionsHouse is one of the best options trading platforms available today. It costs $79 per month, but you can get a discount if you sign up for an annual plan that costs $799.


How to analyze market trends.


The first step to understanding trends is to look at the market's overall direction. You can do this easily by checking out a chart on your broker's site or using a third-party analysis tool like TradingView, which offers its own charting package.


Once you've identified the general trend for the day, check for any other indicators that might confirm (or disprove) your assumption about its direction. For example: if you see that multiple stocks in your portfolio are moving in tandem with one another, it could be an indication of an industry-wide trend. The same goes for commodities and indices—if they're all moving in sync with one another, there may be some underlying cause driving them all higher (or lower).


On top of identifying trends based on price movements alone (which is called technical analysis), there are other forms of technical analysis that use charts as well as volume data to identify patterns within those charts themselves; these include candlestick charts and RSI indicator signals among others.


How to choose your strategy: covered call, collar, vertical credit spread, iron butterfly, iron condor, long straddle, long strangle, calendar spread and protective put.

  • Covered call. A covered call is a stock option strategy that involves buying an underlying stock, selling a call option at a higher strike price and then collecting the premium received as income. When the stock's price rises above the strike price of your short call, you'll exercise this option and sell your shares to the buyer of that call. This can be profitable even if the market goes down because you still get paid for partially owning those shares.


  • Collar. A collar is similar to a covered call except you simultaneously buy put options at lower strike prices as well as writing calls at higher strike prices. The idea here is to limit risk while still earning some extra income from selling uncovered calls against other positions held in your portfolio (for example, if most of your portfolio consists of stocks). Because there are multiple elements involved in this strategy—including both long and short positions—it's important not only understand them individually but also how all these parts fit together in order for them function effectively as part of an overall trading strategy."


  • Vertical Credit Spread. When you buy a call and sell another call at a higher strike price, then that is called a vertical credit spread. You can also reverse this by buying a put and selling another put at a lower strike price. The goal of this strategy is to make money when the underlying stock doesn't move very much or goes up slightly. This strategy can be used on stocks, ETFs and options on futures contracts.


  • Iron Butterfly. An iron butterfly is a combination of a long put spread and short call spread. The goal of this strategy is to earn money when the stock price doesn't move too much but you also want some protection from a drop in price. This strategy can be used on stocks, ETFs and options on futures contracts.


  • Iron Condor A long iron condor is a combination of a put spread and call spread. The goal is to make money when the stock price doesn't move too much but you also want some protection from a drop in price. This strategy can be used on stocks, ETFs and options on futures contracts. The short iron condor is a combination of a put spread and call spread. The goal is to make money when the stock price doesn't move too much but you also want some protection from a drop in price. This strategy can be used on stocks, ETFs and options on futures contracts.


  • Long Straddle. A long straddle is a strategy that involves purchasing a call and put with the same expiration, strike price and underlying stock. The goal is to make money if the stock price moves significantly up or down. The key to this strategy is selling options instead of buying them. This allows you to keep your risk limited when trading options for beginners.


  • Long Strangle. This is a similar strategy to the long straddle, except the call and put have different strike prices. This can be used when the stock price movements are expected to be small. The key to this strategy is selling options instead of buying them. This allows you to keep your risk limited when trading options for beginners. The key to this strategy is selling options instead of buying them. This allows you to keep your risk limited when trading options for beginners.


  • Calendar Spread. This is a strategy that can be used when you expect the stock price to remain stable and then rise. The key is buying an option with one expiration date, and selling one with another expiration date. This allows you to keep your risk limited when trading options for beginners.


  • Protective Put. This is a strategy that can be used when you expect the stock price to fall. The idea behind this strategy is to buy an option that has a low price, and sell one with a higher price. This allows you to profit from the time decay of both contracts.




Trading options can be complicated but you can find simple explanations here.


Options trading is a great way to make money and reduce risk. It can be complicated but you can find simple explanations here.

If you're looking for more information about options trading, check out our free guide to options trading for dummies.


Conclusion


Options trading can be complicated, but it doesn’t have to be. The more you know about options, the better you can use them to your advantage. This guide will teach you everything from how they work to how they can help protect your portfolio from risk and volatility.

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