To start Option trading it is important to make solid foundation about how the option works and how they can help you to achieve goals. Here we are including some Option strategies which can help beginners.
Option Trading Strategies to Protect Profits
These strategies are also known as Hedging (protecting) strategies, which are used to limit loss.
1) A Married Put Position
2) Buying a Proactive Put
A Married Put Position
Let see example an investor buys 100 shares of XYZ stocks at Rs 90/share . As protection against declines, he buys a 1 XYZ Put Option of strike price 90 for Rs 2.
100 shares of XYZ stocks (90*100) Rs 9000 + 1 XYZ put option (2*100) Rs 200= Rs 9200(Total amount paid).
Now if the stock price drops to Rs 60 then the investor will exercise put Option. The Put Option gives him the right to sell the stock at strike price Rs 90 whatever the current price of the stock is. So by this method, he will limit his loss to the price paid for put option i.e Rs 200. Without the Put the entire loss of investor is Rs 9000. Maximum gain in this strategy is unlimited.