If you are willing to spend time, be patient and grind out an average annual return of 10% as a stock investor, history says you can do exactly that. All you would need to do is invest is a fairly diversified portfolio of good stocks and let the portfolio so all the work. If you are interested in potentially increasing your annual returns, there are other stock market investment strategies you might want to consider.
If and when you get comfortable with your knowledge about stock investing, you might want to start thinking about playing stocks options. With the right options strategies, you would get the opportunity to do two things. You could always use some of the strategics listed below defensively as a way to protect your current stock portfolio. You could play options as a way to create more investment income.
Before the discussion starts, you need to understand that playing options is a riskier endeavor than buying and selling the underlying securities. The good news is that your risk is capped at the price you would pay for any option while the potential reward is only limited by time.
Basics for Beginners – What Are Options?
Playing stock options is similar to wagering on a particular stock to go up or down within a prescribed period of time. If an investor believes a stock will increase during the allowed time-frame (before expiration date of option), they could purchase a call option, which is the right to buy 100 shares of the underlying stock at a specific price called the “strike price.” If an investor believes a stock is headed down, they could purchase a put option, which is the right to sell 100 shares of the underlying stock at the strike price.
Stock options are listed alphabetically on options exchanges by company/then strike price/then expiration date. Expiration date falls on the third Friday of the month for which the option is listed.
Options Trading for Beginners – Benefits of Playing Options
Surely, there has to be benefits to you doing something before you would choose to do it. There are several benefits you could derive from playing options.
First, the cost of buying options (control over 100 shares of stock for a limited time) is but a fraction of what it would cost to buy 100 shares of the underlying stock. Example: If you wanted to buy and hold 100 shares of IBM today, it would cost $13,500 plus commissions for 100 shares. If you wanted to buy a call option with the right to buy 100 shares of IBM at $135 on or before February 21, 2020 (February expiration date), it might cost you $5 a share or $500.
Second, as we alluded to earlier, your loss risk would only be the $500 with unlimited upside potential. If you owned the stock, you could lose the entire $13,500 if the company went chapter 7 BK. Of course, that’s not likely.
Finally, the profit return on the amount invested is often much higher than it would be from buying stocks. Stocks are intended as a long-term investment while options are intended for the short-term with higher risks and higher returns.
Essential Options Trading Strategies
Any discussion about essential options trading for beginners would be remiss without mentioning a handful of options strategies that beginners should certainly consider.
The most basic strategy would be to buy the call or put option, wait for the stock to move in the right direction and subsequently sell and take profits when available.
If you own stocks with listed options, you could actually write a covered call. This is a strategy you would use to collect the premiums associated with the option and hope the option expires with the stock lower than your strike price. If that happens, you keep the premium, you keep the stock, and you can write another covered call. At worse, you hold the premiums while selling the stock at the strike price for what would likely be a profit.
Other options strategies that you might want to consider and research are as follows: writing naked calls and puts, straddles, collars, spreads and strangles.
Before you invest in options, you need to do a little research to ensure you have a reasonable idea of what to expect. With these essential options strategies for beginners, you would be amazed at how much you could make in a short time.
