Learn Three Basic Option Trading Strategies

We already discussed effective binary option strategies on this website. However, the topic is incredibly vast, so this article is going to focus specifically on 3 binary option strategies that you can apply in your day trading and use to grow your skillset as a professional trader.

An option is a common financial instrument that specifies the contract between two parties for a future transaction of an asset at a strike price. The buyer of an option gains the right but not the obligation to buy an asset at a fixed price before an expiry date. This is known as a call option. The seller of an option gains the right but not the obligation to sell an asset at a fixed price before an expiry date. This is known as a put option. Stock options are options in which the underlying assets are stocks of shares. Because of their versatility stock options have become very popular in stock markets as a method of income generation as well as a method of protecting investment.

As there are different types of options and trading methods, a lot of option trading strategies have been developed. There are chances of getting confused when a trader goes through these strategies. What an option trader should do is to find the best strategies suited to his trading strategy and to stick to it, rather than testing all the available strategies. Option strategies have been developed with the aim of generating income as well as hedging (protecting investment).

Three basic option trading strategies commonly used are explained below:

1. Married put position

Married put position is used for hedging or protecting investments against possible declination in stock price. In this strategy an investor buys a put option and an equivalent number of shares of the underlying stock simultaneously. This called marrying a stock and a put option. The put option gives the investor the right to sell the stock at an earlier agreed price. Thus if the stock price falls he can sell it at the strike price, thereby covering the loss.

See video below:

2. Protective put position

A protective put position is similar to a married put position and protects the investor from the risk of loss. The difference is that the put position and the stock are not bought simultaneously. A protective put position is when an investor buys put options of stocks he/she already owns. This strategy is taken when an investor sense a possibility of price fall in the stocks he owns.

See the video below:

3. Buying put options

This is a common option trading strategy used for income generation. Buying a put option gives the buyer the right to sell a stock at an earlier agreed price before an expiry date. So if the stock price falls, the value of his put option will rise as he has the right to sell it at a higher price. So he can sell it to gain a profit. If the price falls, his loss is only the small premium paid. This is a method of profiting from price decline without taking short positions.

See the video below:

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