In “The Top 3 Easiest Options Strategy (For Beginners)” video by Options with Davis, you will discover simple strategies that are perfect for beginners in options trading. These strategies, including the covered call, cash secured put, and the wheel strategy, can be executed easily by following a few rules. The video outlines the pros and cons of each strategy, such as generating income and potentially getting a discount on stocks, while also highlighting the risk of having shares called away. Whether you are new to options trading or have never traded options before, these strategies are a great starting point to navigate the complexities of options trading. No matter your experience level, the video provides valuable insights that can help you make informed decisions in your trading journey.
The Top 3 Easiest Options Strategies (For Beginners)
Options trading can be complex and overwhelming, especially for beginners. However, there are simple strategies available that can help simplify the process and make it more accessible to new traders. In a video by Options with Davis, the top three easiest options strategies are discussed, providing a starting point for those who are new to options trading or have never traded options before. These strategies can be executed effectively by following a few simple rules. The three strategies covered in this article are the covered call strategy, the cash secured put strategy, and the wheel strategy.
Covered Call Strategy
The covered call strategy is often considered the easiest option strategy to get started with. It is a straightforward strategy that involves selling a call option on a stock that you already own. The main requirement for this strategy is that you need to have at least 100 shares of a stock.
To execute the covered call strategy, you simply sell a call option for every 100 shares of stock that you own. This allows you to collect income from selling the call option while still owning the underlying stock. It’s important to note that if you have less than 100 shares, selling a call option would be considered a naked call option, which can be quite risky.
One of the key benefits of the covered call strategy is that it allows you to generate income by selling call options on your existing stock holdings. Each time you sell a covered call, you receive a premium, which goes straight into your trading account. This premium can help offset any losses in case the stock price drops. The frequency at which you sell covered calls can vary based on your preferences, whether it’s every seven days or every 30 days. It’s a trade-off between a higher return on investment (ROI) with shorter expirations or a higher premium with longer expirations.
Another advantage of the covered call strategy is that it provides some protection against upside risk. Since you already own the underlying stock, you are covered if the stock price shoots up. In the event that the call option expires in-the-money and your shares are called away, you have already profited from the increase in stock price and received the premium from selling the call option.
However, there are some drawbacks to the covered call strategy. One of the main risks is having your shares called away if the stock price is above the call option’s strike price at expiration. This means that you will lose the opportunity to hold onto the stock for the long term. It’s important to consider this potential opportunity cost when implementing the strategy.
Cash Secured Put Strategy
The cash secured put strategy is another easy options strategy for beginners. It involves selling a put option to buy a stock at a lower price. This strategy requires you to have enough cash in your account to cover the purchase of the stock if it is assigned to you.
To execute the cash secured put strategy, you sell a put option and collect a premium. If the stock price drops below the put option’s strike price, you may be obligated to buy the stock at that price. However, since you received the premium from selling the put option, your effective purchase price will be lower.
One of the benefits of the cash secured put strategy is the potential to buy stocks at a discount. If the stock price remains above the strike price, the option will expire worthless, and you keep the premium as profit. If the stock price drops below the strike price, you have the opportunity to buy the stock at a lower price, effectively providing a discount.
Similar to the covered call strategy, the cash secured put strategy also has potential risks. If the stock price continues to drop significantly, you may end up buying the stock at a higher price than the market value. It’s important to carefully evaluate the stock and ensure you are comfortable with the potential purchase price.
The Wheel Strategy
The wheel strategy is a bit more advanced but still relatively easy to understand for beginners. It combines both selling cash secured puts and covered calls to generate income. This strategy involves selling puts to potentially buy a stock at a lower price and then selling covered calls on the acquired stock to generate additional income.
To execute the wheel strategy, you start by selling a cash secured put on a stock you would like to own. If the put option is assigned to you, you buy the stock at the strike price. After acquiring the stock, you then sell a covered call on the stock to collect income from selling the call option.
The wheel strategy provides the opportunity to generate income from both the put options and the covered calls. It also allows you to potentially acquire stocks at discounted prices through the put options. By continuously repeating this process, you can generate consistent income and potentially benefit from market fluctuations.
However, like the other strategies, the wheel strategy has its own set of risks. One of the main risks is having your shares called away if the stock price is above the call option’s strike price at expiration. It’s important to carefully select the stocks and strike prices when implementing the wheel strategy to minimize the risk of having shares called away.
Pros of These Strategies
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Generating Income: All three strategies discussed—covered call, cash secured put, and the wheel strategy—have the potential to generate income through the premiums received from selling options. This income can provide a steady source of cash flow for traders.
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Potential for Stock Discounts: The cash secured put strategy and the wheel strategy offer the opportunity to buy stocks at discounted prices. If the stock price drops below the strike price, traders can purchase the stock at a lower price than the market value.
Cons of These Strategies
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Risk of Having Shares Called Away: One of the main risks of the covered call strategy and the wheel strategy is having your shares called away if the stock price is above the call option’s strike price at expiration. This means you may lose the opportunity to hold onto the stock for the long term.
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Need for Careful Stock Selection: Implementing these strategies requires careful stock selection. It’s important to choose stocks that align with your investment goals and have stable or positive price trends. Careful analysis and research are necessary to minimize potential risks.
Conclusion
Options trading can be intimidating for beginners, but there are several easy strategies to consider. The covered call strategy, cash secured put strategy, and the wheel strategy provide accessible options for new traders. These strategies offer the potential to generate income and potentially acquire stocks at discounted prices. However, it’s crucial to understand the risks involved and carefully select stocks and strike prices. By following a few simple rules and thorough analysis, beginners can execute these strategies effectively and build a solid foundation in options trading.