Different Types of Metrics Involved in Options Trading Strategies
Before you hop on to option trading and its strategies, do you know what is trading? In simple terms, trading is buying and selling of bonds, stocks, commodities, and currencies. There are different types of trading such as day trading, swing trading, scalping, and momentum trading. Are you a beginner in the trading field? If yes, then you can easily download the Algo trading app which will guide you in trading. Through this app, you can easily earn from the crypto market, stock market, and forex market.


Brief Information on Options Trading

Have you ever heard about options trading? If you haven't, then here is what you need to know about it.

The term options trading is a contract that allows the bearer to own the right to buy and sell a stock that will be based on an apprehended price. There is no obligation on buying and selling stocks; it is completely your choice. This derivative trading is done through an online platform that lets you enjoy trading by being in your comfort zone.

Now you might be thinking about where to do options trading, right? So, several options trading apps can make trading much easier for you.

The working of options trading is quite different but if you understand it once, you will be able to easily trade with it. The working of options trading depends on determining the probabilities of future price events. The key to understanding the relative value of options is to understand that if something is more likely to occur then the options would become more expensive. Whereas, an option will have lesser value if there is less time until expiry.

Do you know why the option is a derivative? It is because its price is intrinsically linked to something else's price. There are two types of options, call option and put option. In simple terms, the call option gives you the right of buying a stock whereas the put option gives you the right of selling a stock.


How to Begin with Options Trading?

Now you might be thinking about how to trade options, right? So, there are numerous Options Trading Platform where you can trade.

To trade, you need to open an account which might require you to submit documents like a Pan card, Aadhar card, Canceled cheque, Salary slip, and IT return or IT form.

Once you have opened an account, all you need to do is to add a specific amount that you want to put in options trading. After this, you can create a watch list as that will help you in keeping a track of the options. Later you can place your order for buying an option followed by square off and exit.

While you are trading options, it is very important to know about a few basic things and those are mentioned below

  • Buy (long) calls
  • Sell (short) calls
  • Buy (long) puts
  • Sell (short) puts

5 Important Strategies and the Metrics Involved in Them

Open interest in options trading plays an important role just like its strategies do. So, whether you are a beginner or you have been into trading for a long time, below are a few strategies that will be quite helpful for you.

1) Married Put
In this strategy, an asset is purchased by an investor and put options are also purchased for an equivalent count of shares. This strategy can be used to protect the investor's downside risk while holding the stock. The functions of this strategy are quite similar to that of an insurance policy and because of this, it is commonly known as a protective put.

2) Covered Call
The covered call is amongst the most popular strategies as it reduces risks and generates income. If you are an investor, and in the stock, you have a short-term position along with a neutral opinion then you can choose this strategy.

3) Bull Call Spread
In this strategy, you will be able to notice that the investor would buy calls at a particular strike price and will sell those calls at a comparatively higher strike price. Do you know when an investor uses this strategy? It is when they want a moderate rise in the asset's price. With this strategy, the investor reduces the net premium spent and also limits their upside on the trade.

4) Protective collar
This strategy is performed by the purchase of an OTM which stands for out-of-the-money put option while at the same time, the investor writes an OTM call option. Usually, this strategy is performed after a long position when the stocks have experienced substantial gains.

5) Long strangle
In this strategy, the investor purchases a put and a call option with different strike prices. While investors use this strangle strategy, they believe that there will be a large movement in the underlying asset's price but they aren't sure of the direction of the movement

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6) Break Evens
Break evens are another important metric that you need to be aware of when using options trading strategies. A break-even point is a price at which a strategy has neither a profit nor a loss. It's calculated by taking the difference between the strike price and the underlying price and dividing it by the contract multiplier.

7) Max. Profit
In options trading, the maximum profit is the difference between the strike price and the underlying price at expiration. This means that if you buy an option and choose a strike price in advance, you'll know what your maximum profit could be before you make any investments. Maximum profit is achieved when the underlying price is equal to or higher than your chosen strike price.

8) Max. Loss
The maximum loss that can be incurred by an option strategy is known as the Max Loss. This is equal to the difference between the strike price and the price at which you bought or sold a Call or Put option.

9) Estimated Margin
The estimated margin is also known as the collateral requirement. The estimated margin is the number of securities that you are required to maintain with your broker or custodian in order to trade options on a given futures contract. Estimated margin, when calculated based on options contracts, is not fixed and can vary depending on the price of an option and the volatility associated with it.

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Conclusion
Options trading can be a great way of earning but you need to be smart enough to understand the concept. For your guidance and help, you can utilize the above-mentioned strategies as they will let you make profits in options trading. You can also use the options trading app for better usage and guidance while trading.
Download SpeedBot Algo Trading App

 

Different Types of Metrics Involved in Options Trading Strategies
Aashutosh C 4 January, 2023
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