Options are conditional derivative contracts which allow contract buyers (option holders) to buy or sell a security at a price chosen. Option buyers are paid the sellers for such a right by an sum called a "premium." If market prices for option holders are unfavorable, they will allow the option to expire worthlessly, thus ensuring that the losses are not higher than the premium. By contrast, sellers of options (option writers) assume greater risk than buyers of the option, which is why they demand this premium.





Options are divided into the options "call" and "put." With a call option , the contract holder acquires the right to buy the underlying asset at a fixed price in the future, called the exercise price or the strike price. The buyer acquires the right, with a put option, to sell the underlying asset at the agreed price in future.





Option Trading Strategies Beginners

Whether you're a bull, bear or a neutral stock market view, there are ways to bring the power of options to work for you. And, to do so, you don't have to be an investment genius. For so many options available for trading strategies, where do beginners want to start? In this post, we will cover our picks to beginners for the top 3 trading options strategies.





(1) Selling Put Spread Strategy

This options trading strategy for beginners is to sell put spreads (short put spreads), since the strategy has positive market exposure (which most investors want), has minimal potential for loss, and can be implemented in small trading accounts.





Setting Up The Trade

(B) Buy another put option at a lower strike price than the sold put (same quantity and expiration cycle).





The position will be entered for a credit, meaning you'll collect money from the sell of the spread. This is because the put you are selling will be more expensive than the put you are buying.





How The Trade Makes Money

In the simplest definition, as long as the stock price stays above the strike price of the short put as time passes, a short put spread makes money:









As we can see, there is a point in time from the entry point of the short put spread, where the stock price is below its price. But the put spread has lost value since time has passed, and is therefore profitable.Short put spreads lose value when the stock price falls, but have minimal potential for loss. Maximum loss happens when the stock price is below the bought put's strike price at expiry.





(2) Selling Iron Condor Strategy

Selling an iron condor (short iron condor) is a perfect options trading strategy for beginners since the position is non-directional, giving range-bound stocks a profit opportunity, providing profit potential in range bound stocks. The trade can be as conservative or aggressive as you would like.





Setting Up The Trade

(A) Sell a put spread (sell a put, buy at another put at a lower strike price).

(B) Sell a call spread (sell a call option, buy another call at a higher strike price).





The position will be entered for a credit, since the puts and calls you sell will be more expensive than the puts and calls you purchase.





How The Trade Makes Money

Short iron condor positions make money if the stock price stays between the call's strike prices and the put that are sold:









When you sell iron condors, you'll lose money if the stock price moves too far in either direction. The maximum potential loss occurs when the stock price is above the strike price of the purchased call option, or below the expiry strike price of the purchased put option.





(3) Covered Call Strategy

The covered call, which is great strategy for beginners to start with because those with stock investments can easily implement the strategy.





Covered calls require ownership of 100 stock shares, making it less accessible to those with small trading accounts, so the strategy requires more money to get started. However, covered calls can provide downside protection for those with at least 100 shares of stock in their investment portfolios if the stock price falls, and profit potential if the stock remains flat.





Setting Up The Trade

(A) Buy 100 shares of stock.

(B) Sell 1 call option against the shares (typically expired 30-60 days)





How The Trade Makes Money

Covered call positions make money as long as the stock price doesn't fall substantially:





As we can see, the covered call position outperforms the stock position over the entire period, because the premium earned from the selling of the call option against shares provides insurance against downside when the shares fall. Additionally, the covered call position will also outperform when the share price remains flat or increases gradually over time. The only time a covered call portfolio under-performs a long stock portfolio is when the share price significantly increases.





Final Thoughts

The number of strategies that can be used when starting out as an options trader can be intimidating , especially the more complex strategies.