Options trading seems intimidating to new investors, but with the right approach, it can be a really powerful tool for making money, as well as managing risk. This guide is going to take apart the basics of options trading, explain key strategies, and let you understand how to use them on Tradetron. By the end, you'll have a good starting foundation to start trading options confidently.
What Are Options?
Before presenting strategies, it is essential to know what an option is. An option is a financial contract that gives the buyer of the option the right, but not the obligation, to buy or sell an asset at a specific price before a certain date.
There are two major kinds of options:
Call Options - Gives the buyer the right to purchase an asset at a specific price the strike price.
Put Options – It is a contract that gives the buyer the right to sell an asset at a certain price.
Let's break them down further.
Call Options
When you buy a call, you think that the asset-more than likely it's a stock-will rise in value before the date when the option is supposed to expire. Well, if the stock shoots up above the strike price, you can buy it at that lower price and hopefully sell it for even more money.
Put Options
With put options, you sell an underlying asset at a specific price. This strategy is useful in case you expect that the asset's value will go down. It protects your portfolio from possible losses.
Basic Options Trading Strategies for Beginners
Now that we've familiarized you with the basics, let's have a look at some more beginner-friendly strategies you may try on Tradetron.
Covered Calls
Owning the stock and selling a call on that would be a covered call strategy. That's a nice way to make money off a stock you already own, and it's useful in those situations where you wouldn't have expected much of a price movement in the stock. If the stock doesn't go above the strike price, you get to keep the premium you received from selling the call.
Example: You have 100 shares of Stock ABC and sell a call option with a strike price of 500₹. If ABC stays below 500₹, the option expires, and you keep the premium.
Buying Calls and Puts
Buying calls and puts is probably one of the easiest ways to start trading options.
Buying a Call: You go long on a call when you think the price will go up. Your profit is unlimited if your stock does but has a capped loss to the premium you paid for that option.
Buying a Put: You go long on a put when you anticipate a decline in the stock price. This is a very effective way to hedge against potential declines in stocks you already own.
Example: Assume that Stock XYZ is trading at 100₹ and you purchase a call with a strike of 105₹ for 20₹. If XYZ increases to 110₹, you can purchase it at 105₹, and you are in the money (less the premium).
Protective Puts
A protective put is just buying a put option to protect a portion of your stocks from certain huge losses. It's like buying insurance on an investment. If the stock falls, your put option increases in value, offsetting some of the loss.
Example: You hold 100 shares of Stock DEF and fear a price crash. You buy a put option at a price barely lower than the going market price. If DEF goes down, your loss is reduced by the put.
Understanding Risk
Options trading is far from risk-free. In fact, options can expose you to huge losses if not careful enough. Thus, advance precautions in terms of a proper risk management plan are considered significant.
Here are some ways by which you can manage your risks:
Set Stop-Loss Orders: These can limit the extent to which you lose by automatically closing a trade when the price moves against you.
Invest only a fraction of capital in the options: Just as much as you've invested in this business, make sure to only invest half of that amount. Never risk more than you can afford.
Understand the Risks: Get a minute or two to study the particular losses each strategy brings.
Why Trade Options on Tradetron?
Options trading on Tradetron is also made easy through automated strategies. For option trading, beginners also appear to find it easier to take charge of their trades.
Tradetron allows users to create their own options strategies or use the available ones for a more efficient trading mechanism.
Benefits from Trading Options
Although options possess risk factors, they do offer some attractive benefits:
Income Generation: By using covered calls and other types of options strategies, you can earn regular income on stocks that you already own.
Portfolio Protection: Options can hedge market meltdowns protecting investment from consequential loss.
Flexibility: Options provide more leverage toward making money through different market scenarios than trading in stocks.
Step by Step Guide How to use Option Wizard on Tradetron
1. Access the Tradetron website through credentials
one needs to register to acquire the credentials if they do not have an account.
2. Access the Option Wizard
After gaining access log in and navigate through to the "Option Wizard" from the dashboard menu located under "Create Strategy".
3. Select Your Market
But before this step, you need to select the market or instrument you are interested in trading options for. The Option Wizard allows you to create strategies for indices, equities, or any other type of option-traded securities.
4. Select a Strategy Template
The Option Wizard predefines many strategies by applying templates to common options strategies such as Iron Condor, Straddle, Strangle, Bull Put Spread, and Bear Call Spread, which can be chosen from a drop-down list or selected as a custom option to create your own.
5. Define Strategy Conditions
Now, define the conditions to enter and exit the strategy. The Option Wizard will walk you through how to establish those conditions to include:
Entry Signal: Decide when the strategy should be activated using indicatively within a parameter of technical analysis, or through market conditions
Strike Price: Determine the strike price based on how deep you would want to get your option in the money and if a comparable basis for out-of-the-money is indicated
Expiry Date: Determine the expiry date of the option that you want to trade in
Position Type: Decide whether you would want to sell or buy the option; call or put.
6. Set Risk Management Rules
Percentage-based Stop Loss.
A Stop Loss at the determined point.
Trailing Stop Los.
Similar to this, you can aim for a profit while closing your position at the time.
when a specified profit level is acquired.
7. Back Test Your Strategy
You should backtest your strategy before going live. Tradetron has a backtesting tool that lets you run your strategy on historical data to see how it'll be effective and profitable in the long term.
8. Review and Save Your Strategy
Now that you have set your parameters, check over your strategy to ensure that all of your conditions match your trading goals. Once it looks good, save your strategy and implement it.
9. Deploy the Strategy
Saving will then open the doors to deploying the strategy live. The system will then automatically execute trades based on the conditions that you defined with the Option Wizard.
10. Monitor Your Trades
It means that after you upload your strategy to the platform, you can view its performance in your trading platform instantly from your Tradetron dashboard. You may now track all trades taking place and change your strategy if required.
FAQs
What are the two most basic types of options trading?
There are only two main types of options: the call option where you get the right to buy an asset, and the put option where you get the right to sell an asset.
Is options trading suitable for a beginner?
Yes, but the business should be started with very simple strategies like covered calls and buying calls/puts. Always learn about the risks involved before investing.
How do I benefit from Tradetron in options trading?
Tradetron helps you with automated options trading strategies, making it easier for you to deal with trades with less manual work.
What is a covered call strategy?
A covered call is a type of options trading strategy where you are holding the stock and selling a call on it hoping to make some income, especially if you do not expect the stock to move up and down much.
Can options trading strategies bring me regular income?
Yes, some strategies like covered calls can generate consistent income from the stocks you already hold.
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