Options trading is a popular investment method in the UK, as it allows traders to profit from both rising and falling markets. You can use several different options trading strategies to take advantage of these market movements.
Buying calls
One of the most straightforward options trading strategies is known as buying calls. It involves buying a call option on an asset you believe will increase in value over time. If the asset increases in value, you will make a profit. If it doesn’t, you will simply lose the premium you paid for the option.
For example, let’s say that you believe the value of gold will increase over the next few months. You could buy a call option on gold with a strike price of £1,200. If the price of gold increases to £1,300 before the option expires, you will make a profit of £100 per ounce. However, if the price of gold falls to £1,100, you will lose your entire investment.
Covered call
The covered call is one of UK investors’ most popular options trading strategies. It involves buying shares in a company and then selling call options on those shares. If the share price remains static or falls, you will keep the premium from the sale of the call option. If the share price rises, you may be required to sell your shares at the strike price, but you will still make a profit.
For example, let’s say you buy 100 shares in ABC at a share price of £5. You then sell one call option on those shares with a strike price of £6. The premium for the option is £0.50. If the share price remains at £5 or falls to £4.50, you will make a profit of £50 (100 x 0.50). However, if the share price rises to £6.50, you will be required to sell your shares at £6 but will still make a profit of £150 (100 x 0.50 + 100 x 1.00).
Covered put
The covered put is similar to the covered call strategy but involves selling put options instead of call options. It can be used when you are bullish on a particular stock or index. If the underlying asset’s price falls, you may be required to buy it at the strike price, but you will still make a profit from the premium you received from selling the put option.
For example, let’s say you sell one put option on ABC with a strike price of £6 and receive a premium of £0.50. If the share price remains above £6, you will make a profit of £50. However, if the share price falls to £5.50, you will be required to buy the shares at £6 but will still make a profit of £100 (100 x 0.50 + 100 x 0.50).
Straddle
The straddle is an options trading strategy that you can use when you expect a big move in the price of an underlying asset but don’t know which direction it will go in. It involves buying both a call option and a put option on the same asset with the same strike price and expiration date. If the asset’s price moves significantly in either direction, you will make a profit. However, if it doesn’t move, you will lose your entire investment.
For example, let’s say that you buy a call option on gold with a strike price of £1,200 and a put option on gold with a strike price of £1,200. The premium for the call option is £100, and the premium for the put option is £100. If the price of gold increases to £1,300 before the expiration date, you will profit £200 from the call option.
If the price of gold decreases to £1,100 before the expiration date, you will profit £200 from the put option. However, if the price of gold remains at £1,200, then you will lose your entire investment. Click here for more info on options trading.
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