Options Trading Strategy:
Buying calls or puts are the most popular options
trading strategies among retail traders. There are no margin requirements for
this type of trading and an options investor can try buying puts or
calls with a relatively small portfolio.
If an options trader is expecting the market to drop down he/she can buy
puts with expectations to profit from a bearish movement. A put gives to
the owner the right, but not the obligation, to sell an asset at a
specific price (the strike price), on or before a specific date (the
expiration date). If the price of the underlying stock goes down, the
put price goes up.
For example, if you buy a QQQQ options put at $2.00 and the next day
QQQQ stock drops 1%, your puts may increase in value by 20%. You may
then decide to sell the puts and fix a 20% profit, or if your view on
the market is still strongly bearish you may decide to wait and sell the
puts later, in expectation of bigger profits. On the other hand, if
after buying QQQQ put options the QQQQ stock went up, then the value of
the bought put options will decrease.
An options buyer should always be aware that time plays against him.
Even if the market moves flat, the value of the puts may drop within a
couple of days. The closer to expiration the puts are the more
sensitive they are to the time factor.
The maximum loss a put options buyer may experience is 100% of the
amount invested in the put options. The potential profit is
Depending on the trading style and risk tolerance, an options buyer may
chose to buy different types of put options that may vary by strike and
expiration. The most traded options are nearest in the money put
options. They are considered more or less safe and the reaction of the
options price to the changes in the price of the underlying stock is
still big. The deeper in the money put options are considered more
conservative; however, they are more expensive. The cheaper (out of the
money) put options are considered more risky and the cheaper (more out
the money) they are, a bigger move in the underlying stock is required
to trigger changes in the put price.
If at the current moment the QQQQ stock is traded at $44.56
- the $45 strike put options are nearest in the money put options and
may cost $1.50
- the $48 strike put options are deep in the money put options and may
- the $44 strike put options are nearest out the money options and may
- the $36 strike put options are deep out the money put options and may
Now, if the QQQQ drops by 1% the value of the $44 and $45 strike put
options may increase by 20%, the value of the $48 strike put options may
increase by 15% and the value of the $36 strike options will most likely
remain unchanged. Since the QQQQ options price changes by $0.05 it may
require a 5% QQQQ drop to increase the value of $36 strike put options
from $0.05 to $0.10 (by 100%) and time is not on the side of the put
Another parameter that a put options buyer has to define is options
expiration. The closer to the expiration the cheaper put options are,
however, they are very sensitive to time and they are considered more
risky. As a rule 2-3 month expiration options are considered more
conservative and the price of these options are not critically affected
by the short period of time.
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