Stock options trading is all about flexibility. While many investors use stock option contracts to protect themselves from downside market risks, experienced traders may have a different way of looking at it.
To these traders, options are just another tool for taking advantage of both up and downtrends in the market. There are several stock options trading strategies
to try out with a stock options trading accounts. Here is an idea of how they work, this article will take a look at what some of the most common ones are:
Covered Call Writing Strategy: This is one of the simplest yet most effective ways to earn income by investing in stocks or ETFs. A covered call strategy involves selling call option contracts while holding on to the relevant stocks. Selling call options generates cash, which can be used to purchase more shares of the company or another stock the trader deems promising.
Collar Strategy: The collar strategy is a derivative of covered call writing in that it also involves buying and selling options. However, this strategy has its own twist: a trader would first buy put option contracts and sell calls at an appropriate strike price. Then, when the market goes down as expected, they can repurchase the puts at lower prices and cancel the higher-priced calls with no cost to the trader. Thus, they will now have a protective “collar” around the investment if the market takes a turn for the worse.
The Power of Compounding: This describes how small gains can be compounded into larger ones. It works in the sense that every option contract they buy or sell will yield a small profit after it expires, which they can use to purchase more call options for their portfolio. This strategy entails trading in low-priced stocks and ETFs, as their small gains are enough to make up for losses incurred by higher-priced contracts.
