For years, options trading was thought of as a high-risk investing strategy that only a Harvard/MIT math major could successfully use, and there was a shortage of information about options trading for beginners. That narrative has very quickly been debunked as more and more average investors have learned about the risks and rewards of options trading, and have embraced this strategy in their portfolios.
So, if you are new to options and intrigued by the potential and want to learn more, where would you start?
While I am a bit biased, I would look to one of the many options services that Cabot offers. That way you get to learn from an expert like myself. For example …
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The Covered Call
The most basic of options strategies is the covered call/buy write. The nuts and bolts of this strategy are you own or buy 100 shares of a stock, and then you sell a call option against that stock holding so as to collect a call premium.
For example, you could buy 100 shares of Apple (AAPL) and sell 1 call for $5 (which is actually $500 that you collect).
A covered call is a very safe strategy and is actually a way to reduce your risk.
I sell calls in the Cabot Profit Booster portfolio, where I recommend one such trade every Tuesday morning based on fellow Cabot Analyst Mike Cintolo’s stock recommendations. This portfolio is an ideal introduction to options trading for beginners because it couples Mike’s top-notch research with simple, actionable option trades.
Covered calls are good trades for beginners because it’s not much different from buying a stock. You simply need to buy 100 shares per call that you’re planning to sell and then pick a strike price for the call, an expiration date, and a price you’re willing to accept.
If the stock (which you already own) rises above the strike price on expiration, your shares are called away at that strike price. It’s like selling the stock, but you get to collect the premium for selling the call as well.
Importantly, it also doesn’t add additional risk beyond what you face when buying shares. The risk of buying shares is that the stock price goes down, that’s the same with a covered call, except the call premium offsets some of the potential share price decline.
If covered calls aren’t your cup of tea, the next most basic of strategies is buying calls/puts as a way to get bullish or bearish exposure.
Buying Calls (and/or Puts)
The advantage to these strategies is you use the power of options, which is leverage, to get upside or downside market exposure.
For example, instead of buying 100 shares of Microsoft (MSFT) which would cost you $42,000, you could buy 1 call option that might only cost you $2,000 and get similar profit potential should the stock rally.
The biggest difference, beyond lowering your cost, is that buying a call has a ticking clock. If the shares of the underlying stock, in this case, MSFT, fall, move sideways, or don’t rise quickly enough, you will experience “time decay” because one of the important factors that go into pricing options is the amount of time until they expire.
A call that is “in the money” will have intrinsic value (if you have a call with a $415 strike and MSFT is trading at $420, that call has $5 of intrinsic value, regardless of how much the contract costs).
You lose intrinsic value only when the share price falls, but the other part of an option’s price is the time and volatility premium. In other words, how much extra you have to pay beyond the intrinsic value.
Time premium is the part that will “decay” away as you get closer to the expiration date.
When calls are “out of the money” (when the strike price is higher than the share price; e.g., a $425 call on MSFT is out of the money), the contracts don’t have any intrinsic value, and the entire amount you pay for the call is time and volatility premium.
Paying that premium is the cost you incur for leveraged exposure to a trade.
At Cabot Options Trader we use call/put buying, as well as execute covered calls. Plus, you get a detailed explanation of why I recommend those trades including the risks/rewards, updates on where we stand with those positions, as well as access to my email if you ever have any questions, and so much more.
Advanced Options Strategies
Finally, if you are ready to take the next step, and it’s a big step, you can add your name to the waitlist for Jacob’s Private Circle (JPC). This is a super small group of traders executing both basic and sophisticated options trading strategies (iron condors/diagonals/etc.).
These types of trades use multiple “legs” (options contracts with different expirations or strike prices) to change both the risk profile and profit potential of the trades.
It’s a bit much to get into here, but it includes strategies like spreads and straddles.
Stepping back, in the over ten years I’ve been at Cabot I have seen the options world explode in popularity. This breakthrough in options trading joining the mainstream investing world, along with the countless traders I’ve taken from beginners to intermediate to pro levels has been extremely rewarding.
If you are interested in learning about options trading, now is the time to join the party, and Cabot is a great place to start.
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