Explanation option strategy. How and Why to Use a Covered Call Option Strategy
Option buyers are charged an amount called a "premium" by the sellers for such a right.
In contrast, option sellers option writers assume greater risk than the option buyers, which is why they demand this premium. Options are divided into "call" and "put" options.
Bullish strategies[ edit ] Bullish options strategies are employed when the options trader expects the underlying stock price to move upwards. The trader may also forecast how high the stock price may go and the time frame in which the rally may occur in order to select the optimum trading strategy for buying a bullish option. The most bullish of options trading strategies, used by most options traders, is simply buying a call option. The market is always moving.
There are some advantages to trading options. The following are basic option strategies for beginners. Potential profit is unlimited, as the option payoff will increase along with the underlying asset price until expiration, and there is theoretically no limit to how high it can go.
With a put option, if the underlying rises past the option's strike price, the option will simply expire worthlessly. In exchange for this risk, a covered call strategy provides limited downside protection in the form of premium received when selling the call option. A protective put is a long put, like the strategy explanation option strategy discussed above; however, the goal, as the name implies, is downside protection versus attempting to profit from a downside move.
If a trader owns shares that he or she is bullish on in the long run but wants to protect against a decline in the short run, they may purchase a protective put.
Hence, the position can effectively be thought of as an insurance strategy.
The trader can set the strike price below the current price to reduce premium payment at the expense of decreasing downside protection. This can be thought of as deductible insurance. The following put options are available: June options.