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Trading Options for Beginners: Here are 5 Basic Types of Options Trades To Get You Started

Trading Options for Beginners: Here are 5 Basic Types of Options Trades To Get You Started

Trading options for beginners can be a difficult task. After all, there is new terminology to learn, new strategies to apply and a host of new, well, options to look into.

It can seem overwhelming.

Which is why we’ve put together a list of a few of the most commonly asked questions when it comes to trading options, as well as listing the most common option trades.

What are options?

Options – or an option contract – gives the buyer the right, but not the obligation, to buy or sell an underlying security or instrument at a specific price on or before a certain date. As a result, options trading is the process of buying and selling options contracts on financial instruments.

What is a call option?

A call option is a contract that gives the holder the right, but not the obligation, to buy a security or other asset at a fixed price (the “strike price”) within a certain period of time. When buying a call option, an investor is betting that the price of the underlying stock will increase.

What is a put option?options trading for beginners

A put option is a contract that gives the holder the right to sell a security at a specific price within a certain time frame. The put option buyer pays a premium to the seller for this right. When buying a put option, an investor is betting that the price of the underlying stock will decrease.

What is a naked call?

A naked call is a type of options strategy in which the trader sells a call option without owning the underlying asset. This is a high-risk, high-reward strategy that can lead to substantial losses if the underlying security moves in the wrong direction.

What is a straddle?

An options straddle is a type of options trade that involves buying a call option and a put option with the same strike price and expiration date. This strategy is used when the investor thinks that the stock will experience significant volatility in the near future.

What is a spread?

An options spread is the purchase of one option and the sale of another option of the same class and expiration date but with different strike prices.

What is a butterfly?

An options butterfly is a type of options trade that involves buying two at-the-money options and selling one higher and one lower strike option. This trade profits if the underlying security moves a specific amount in either direction.

What is an iron condor?

An iron condor is a type of options strategy that involves buying two out-of-the-money put options and selling two out-of-the-money call options with the same expiration date. This strategy is designed to generate a limited amount of profit while also limiting the amount of potential losses.

What are the 5 basic types of options trades?

  1. Long call: A long call is a type of option trade in which the trader buys a call option and hopes that the underlying stock will rise in price. If the stock price does rise, the call option will increase in value, allowing the trader to sell it at a profit.
  2. Short Call: A short call is a financial investment strategy that allows an investor to profit from a decrease in the price of a security. The investor does this by selling a call option. If the price of the security decreases, the investor can purchase the security at the lower price and sell the call option at a higher price, resulting in a profit.
  3. Long put: A long put is a type of option trade where the trader buys a put option and hopes that the price of the underlying security falls below the strike price by the time the option expires. If this happens, the trader can then exercise the option and sell the security at the strike price, making a profit.
  4. Short put: A short put is where an investor sells a put, essentially betting that the price of the security they sell the put on will increase. By doing this, they collect premium (money) upfront as soon as they enter the trade.
  5. Covered Call: A covered call is a financial investment strategy that involves buying shares of stock and then selling call options against those same shares. This strategy is used to generate income from the option premiums while still maintaining exposure to upside potential in the underlying security.