If you think options trading is risky, think again.
The truth is that there is a range of safe option trading strategies that both limit your risk and maximize your profits.
Today, we're bringing you three simple options trading strategies that are all low-risk. Armed with these choices, you'll see that risk management in options trading doesn't have to eat up all your potential profits.
In fact, you'll see that you can complement your stock investing with these (nearly) risk-free options trading strategies to either enhance your gains or protect against market volatility.
So let's get to it. Here are three low-risk options strategies you can implement right away...
Low-Risk Options Trading Strategy No. 3: the Covered Call
Many guides to options trading for beginners focus only on buying options. Many will tell you that selling call options is particularly risky because the potential losses are unlimited.
Theoretically, that's true. But with a covered call, you can drastically reduce that risk.
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Normally, if you sell a call option for a stock with a $50 strike price and the stock then rises in share price, you're on the hook for the difference.
Here's an example. Let's say you have to buy the stock at $75 per share and then sell it for $50 per share. That means you have to eat that extra $25 per share. If it goes up to $100 per share, that's even worse. If it goes up to $200 or $500... you get the idea.
But that assumes you don't already own the stock. If you bought the underlying stock before selling the option, and therefore locked in your price, your potential losses are capped.
That's how the covered call works.
As the name suggests, the call option you sell in a covered call is covered by the shares of the underlying stock you already own.
Even in the worst-case scenario, you'll only have to sell the shares you own at the agreed strike price. That price might be less than the current market price for the shares. But if you've owned the stock for a while, you still might be selling for a profit.
And that's just if things go badly. When the trade goes in your favor, a covered call can hand you bigger profits than if you just held onto your stock shares.
Basically, you want to execute a covered call when you want to hold onto a stock for the long term, but you anticipate that the share price won't move much in the short term.
If you're right, the buyer will never exercise the option, because it's not worth it if the price didn't move. And you get to keep both the stock and the premium you collected for the option.
Later, when the stock does rise in price, you'll be even richer for using the covered call when the timing was right.
In other words, there's not much risk. But there is significant reward if you execute the covered call well.
And that's just the first strategy we have for you today...
Low-Risk Options Trading Strategy No. 2: the Married Put
A married put is similar to a covered call, but instead of selling a call option on stock you own, you are buying a put option.
That means, at the end of the option duration, you have the right to sell the stock you own at the strike price.
With a married put, your potential profit is limitless. If the stock price goes up, you can let the put option expire and hold onto the stock (or sell it at a higher price).
And the risk is very low. Even if your stock shares fall in price, you can still sell it at the strike price.
The only real downside of the married put is that the stock price has to rise by more than what you paid for the put option in order for you to profit from it.
But if you're making a speculative purchase of a stock with a ton of profit potential and you want to protect against the downside, the married put is a great insurance policy. If the stock doubles, triples, or more, you won't remember the price you paid for the option. You'll just be reveling in your profits.
If you make a number of speculative plays like this, you increase your chances that one or two rocket stocks will pay for the rest that don't take off. And your married puts keep any one stock from being a dead weight on your portfolio.
That being said, you don't want to buy married puts on every stock you own: Those premiums and commissions add up.
You'll want to use this tool judiciously. A good time is when you see potential volatility ahead for a stock you are otherwise very bullish on.
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Some people might tell you that it's technically only a married put if you buy the stock and an at-the-money put option at the same time. But if you want to buy a put option (at any strike price) on a stock you already own and call it a married put, rest assured that the SEC isn't going to come and stop you.
Another caveat with a married put, as well as the covered call, is to make sure you own enough shares of the stock to cover the whole contract. If you only have 50 shares and you'd have to buy another 50 to complete the sale, a tremendous amount of risk is added to your position.
And now for the final safe options strategy...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
Low-Risk Options Trading Strategy No. 1: the Bull Call Spread
If you're bullish on a stock but you really want to limit your risk, the bull call spread might be for you.
You already know that buying a call option can be profitable if the underlying stock goes up in value. And the most you can lose in such a trade is the premium you paid for the option - typically a fraction of the underlying share price.
But if even that is too much risk, you can effectively lower the price of the call option by selling another call option on the same stock.
The trick is that the call option you sell will have a higher strike price.
Say, for example, you buy a call option on a stock with a strike price of $50 per share. That gives you the right to buy the stock for that price.
Then you sell a call option for, say, $60 a share, giving the buyer the right to buy the stock from you at that price.
If the stock goes up to $55, you're good. You can buy it at $50 per share and collect the profit (or close your position for a profit before the expiration date).
If the stock goes up to more than $60, you're still good. Your buyer decides to buy it from you at $60, which is no problem, because you can buy it for $10 less. (Again, you can also close out both positions before the expiration and take your profit.)
The downside, you can see, is that once the underlying share price passes the strike price of the option you sold, your profits are capped.
But the advantage is that you didn't have to pay much up front. The call option you sell will be cheaper than the one you buy, because the strike price is higher. So you'll end up paying more than you take in at the beginning. But you've significantly lowered the up-front costs by adding the short call on top of the long call.
That way, the worst-case scenario doesn't sting too badly, because if the stock price falls, then neither you nor your buyer will exercise the options. The amount you lose is only the difference between the option you bought and the option you sold.
And even though your profits are limited, if you make this move successfully a number of times, you can definitely earn considerable income over time.
And if you're looking for more strategies to minimize risk and maximize gains, check this out...
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