No options strategy is risk-free, but there are some that are generally considered lower risk than others. The ‘safest’ options trading strategy often depends on market conditions, your risk tolerance and specific trading goals.
A strategy that’s often regarded as relatively safe is covered call writing – it involves:
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Owning shares of a stock
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Selling (or writing) call options (equivalent to the number of shares you own) on that same stock. Each standard equity options contract represents 100 shares of the underlying stock, so you’d sell one call for every 100 shares you own
You can employ this strategy in our US options and futures account4 but not a spread betting or CFD trading account, as the latter two accounts only enable you to speculate on the price of options rather than actually buy or (as is required with covered call writing) sell these contracts.
Covered call writing is considered relatively safe because of:
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Limited downside risk: your primary risk is the potential decline in the stock price
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Profit generation: you’ll earn premium from selling the call options, which could provide a small buffer against minor price declines
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Defined risk: your maximum loss is limited to the price you paid for the stock, minus the premium received
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Flexibility: you can adjust your strategy monthly by choosing different strike prices or expiration dates
However, it’s important to note that:
Other relatively conservative options strategies include:
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Cash-secured puts
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Collar strategy
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Bull call spreads