These days, a lot of brokers let qualifying clients trade options. You must have approval from your broker for both margin and options if you wish to trade them. There are four basic ways to trade options.

Buy (Long) Calls:

You think the price of the underlying asset will rise. Purchasing a call allows you to possibly profit from an increase in the asset’s price by granting you the opportunity to buy it at the strike price.

Sell (Short) Calls:

Calls can be sold (shortly) if you think the price of the underlying asset will not rise above the strike price. If the asset’s price rises, selling calls (naked calls) without owning the underlying asset exposes you to potentially limitless danger.

Buy (Long) Puts:

Purchasing a put offers you the option to sell the underlying asset at the strike price, allowing you to profit from any decline in value if you believe it will occur.

Sell (Short) Puts:

This strategy is used when you feel the underlying asset’s price will not fall below the strike price. Selling puts can result in a profit from the premium paid, but if the asset falls below the strike price, you may be forced to buy it at that price, exposing you to severe risk.

Strategies for Trading Options

Long Calls: This is a bullish strategy in which you buy call options and bet that the price of the underlying asset will rise. Your profit potential is limitless, but your risk is limited to the premium paid.

Writing Covered Calls: This approach involves owning the underlying asset and selling call options against it. This can provide money from premiums while also providing a limited hedge against price declines. However, the earning potential is limited by the premium received.

Long Puts: A bearish strategy in which you buy put options and expect the underlying asset’s price to fall. Your reward is limited because the asset’s price cannot go below zero, but your risk is restricted to the premium paid.

Short Puts: Selling put options with the expectation that the price of the underlying asset would rise or stay constant. Your maximum return is represented by the premium you received, but there is a substantial risk if the asset’s price drops.

Combinations and Spreads

Combinations: Methods for betting on volatility without a definite directional bias that combine call and put options. Straddles and strangles are two examples of strategies that profit from big price changes in either direction.

Spreads: To lower risk and lower the cost of establishing a position, spreads entail buying and selling options of the same class (calls or puts) with various strike prices or expiration dates. Vertical, calendar, butterfly, and condor spreads are among the several types of spreads.

Synthetics: By combining calls and puts, they can generate positions that resemble holding the underlying asset or other holdings. They can be applied to a number of things, such as cost-cutting or regulatory arbitrage.