I get always asked what are the most basic ways for a newbie to use options.
Unfortunately there is no shortcut in learning options, trying just to use one or two option strategy is counterproductive since it eliminates one if the key advantages of options which is flexibility. What this means in practice is that we don’t take advantage of all the options have to offer to a trader.
However I believe the right question to ask is more on the lines of what options strategies to learn about first.
The answer to this is that the new option trader needs to learn how to correctly use the long put and the Long Call. Once the above strategies are understood I normally recommend learning about the mechanics of Covered calls and the selling of Out of the Money Puts for acquiring stocks. My next options strategy of real interstate is the “Collar”. Each of these trades mentioned here deserves its own article however its instructive to show the main reason of using them.
Long Put is one of the most basic way of using Options to protect a portfolio or to speculate on an expected drop in the price of a stock, ETF. This trade can also be seen as buying insurance for your stock and its used extensively by buy and hold investors that want to protect their portfolio.
Long Call is also one of the most fundamental strategies and its used when trader or investor wants to participate in upside moves in a stock however he does not have enough funds to buy the underlying. This trade gives trader high leverage however it has to be timed right if its to work as intended. Its important for the new Options trader to understand the mechanics of this trade even if he may not be using it a lot at the very beginning.
Covered calls are also promoted heavily by many brokers to investors but to work as intended have to also be timed well. I normally don’t recommend this strategy since most investors do not have the tools, time and patience to try to time the entries. Understanding the mechanics of this trade it’s the first step towards the Collar trade.
Selling out of the money Puts its related to Covered calls and it can be used at times but some of the same shortfalls applies to both.
Collar trade is a key trade for an investor. I believe that in the long run every successful trader will acquire a lot more capital that he trades on a daily basis and can be used in investment type of trades that can be protected with a Collar type of trade.
At The Trader Institute (TTI)we promote good risk management and trades with well defined risk.
These day there are a lot of online resources to learn about Options but our students tell us that they do nit work. Some have paid big bucks for online classes that promise a lot and deliver nothing. We realize that learning Options takes much more than listening to a few hours of video and that is why we offer full mentor-ship in the use of Options. The key differentiation is in the fact that we individually train all the traders and answer their questions to help them move forward on the learning curve.
In fact every day during Asia session we take questions from our members and all the other students can listen in on the answers and refresh their training. During the US global trading room session we also call real time Options trades based on Simon’s calls and members can observe, learn and even participate.
As always we only recommend some trading during the learning phase as not having actual risk in the trade can keep trades more focused on the technique and mechanics of the trading without much emotional load.