For intermediate traders, the finance world can be exciting and challenging. As they progress in their trading journey, mastering new tools and strategies becomes essential to stay ahead in the market. Listed options, a versatile financial instrument, offer an array of opportunities for intermediate traders to take their trading to the next level.
This article explores how intermediate traders can use listed options to their advantage, enhancing their portfolio, managing risks, and maximising profits.
Enhancing the portfolio with options
Intermediate traders trading in markets with brokers such as Saxo Capital Markets can use listed options to enhance their investment portfolios in several ways. One popular strategy is the covered call, where traders own the underlying asset and simultaneously sell call options against it. By doing so, they collect premium income from selling the call options, which can serve as a buffer against potential asset value declines. While the covered call strategy limits the potential upside on the asset, it can be an effective way to generate additional income and reduce the overall cost basis of the investment.
Another strategy to enhance the portfolio is the cash-secured put. Here, traders sell put options on assets they are interested in buying at a lower price. If the options are exercised, the trader will purchase the asset at the strike price, which should be a level they consider attractive. If the options expire worthless, the trader keeps the premium collected from selling the puts. This strategy allows intermediate traders to acquire assets at a discount while generating premium income.
Managing risks with options
Options can also be crucial in managing risks within an investment portfolio. One of the primary risk management strategies is the protective put, commonly known as a “married put.” In this approach, traders purchase put options for assets they already own, effectively creating an insurance policy against potential price declines. If the asset’s value drops significantly, the put option provides the right to sell the asset at the strike price, limiting the potential losses.
Another risk management strategy is the collar, combining the covered call and protective put strategies. Traders holding an asset can simultaneously sell call options above the asset’s current price and use the premium to purchase put options below the current price. The collar limits potential gains and losses, providing a well-defined risk-reward profile for the underlying asset.
Leveraging options in volatile markets
Intermediate traders can leverage listed options to their advantage during periods of high market volatility. The long straddle is one strategy that involves buying both a call option and a put option with the same strike price and expiration date. This strategy is suitable when traders anticipate significant price movements but still determine the direction. If the market experiences a substantial move, either up or down, the trader will profit from the option that has gained in value, while the other option’s premium is a limited risk.
In volatile markets, the iron condor is an additional strategy that combines selling an out-of-the-money call spread and an out-of-the-money put spread. This approach allows traders to capitalise on range-bound markets with stable underlying asset prices. It proves advantageous when anticipating a decrease in volatility, resulting in lower option premiums.
Hedging with options: Protecting against market volatility
Intermediate traders can employ listed options as a powerful hedging method to safeguard their portfolios against unforeseen market fluctuations. One popular hedging strategy is the protective collar, which entails maintaining a long position in the underlying asset while simultaneously purchasing a put option and selling a call option on the same asset.
The put option offers protection against downside risks by granting the trader the ability to sell the asset at a predetermined price in case of a decline in its value. On the other hand, the premium received from selling the call option helps to offset the cost associated with the put option. This strategic combination allows for risk management and potential cost optimization in trading.
To sum things up
For intermediate traders, listed options present many opportunities to enhance their trading experience and achieve their financial goals. Understanding the basics of options and various strategies empowers traders to leverage these versatile instruments. Whether enhancing the portfolio, managing risks, or leveraging options in volatile markets, intermediate traders can confidently trade and take their trading journey to new heights. However, it is crucial to keep in mind that options trading involves risks and may not be suitable for all investors.