If you are interested in trading options, it is crucial to understand how different strategies work. Many people in Germany tend to focus more on buying and holding stocks; however, options can provide viable alternatives to this tactic.
Three main types of options trading strategies
Investors can carry out three main types of options trading strategies in Germany: covered calls, straddles, and protective puts. Let’s look at each one in turn below.
When you own equity (i.e. stock) in a company and think that its value will remain flat or go up slowly but steadily over time (rather than crashing), writing covered calls may be a good strategy, this entails the owner of equity permitting someone else to sell their shares at a pre-specified price at or before a specific date.
If the market value of the shares goes up, this results in increased ownership and earnings for the owner. The main risk here is that if the price increases significantly over that specified price (higher than you can buy them), then you will be forced to sell your equity to the person who now owns the option because they now have priority over it.
This works out well as long as your average purchase price for those stocks is lower than what you would make by selling them off with the covered calls at a higher value.
The straddle technique
The straddle technique involves buying puts and calls (options to sell and buy, respectively) on a security with strike prices at about the same level each – both very close to the current market price. This is considered a very risky strategy, as the market needs to move significantly in one direction (to make money), and there is no guarantee that this will happen.
The protective put technique
The protective put technique involves buying an out-of-the-money put option with a strike price at about the same level as your security’s current value. If you own equity and believe that its value will not fall below a certain point (and you are inclined to take less risk than someone who uses straddles), then this may be right for you.
The main reason it works well is that if the stock does drop, the price of the option increases by an amount equal to how much it dropped to maintain a break-even situation. If you purchased this option when the stock price was lower than your strike price, you could make money if it increases and the option expires (i.e. depletes and becomes valueless).
This works well as long as there is enough time until expiry for this to happen, and the rate at which the stock’s market value goes down is not too great for this to still be likely.
Risks associated with options trading in Germany
Options trading in Germany has many risks that other traders may not be aware of. Because options are traded on an exchange just like stocks, there is no central clearinghouse to help out in the case of default. This can leave investors and funds open to bankruptcy should their counterparty fail to meet their contractual obligations.
Additionally, while stock market data is widely available through several channels, option prices must be manually collected from each European country where the option is traded. The lack of transparency and accompanying tools to trade options effectively makes it challenging for novice traders to get into the game.
Options can be valuable tools when used responsibly, but they can lead to heavy losses when misused. With so many risks involved, mainstream traders should limit their exposure to this market. Before making any decision or taking any action related to option trading germany, always do your research first and consult with a reputable online broker from Saxo Bank.