A stock is a good investment when it pays you dividends, when there’s an exceptional selling opportunity, or when it goes up in price. There are different strategies that can help you in making money from such stocks. In this article, we will discuss three such strategies – vertical trading, short selling, and covered call options
What is vertical trading?
Vertical trading is an options strategy that allows investors to profit from both price appreciation and dividends by holding a few stocks in the same vertical. In other words, you will hold a few stocks in the same industry or sector. You can choose any three stocks that belong to the same sector or industry. A vertical portfolio will typically have the top 10% of the companies in a certain sector. That way you have a higher chance of profiting from the stocks’ rise and also a lower chance of losing money when the price of the stock goes down. For example, if you choose the Food and Beverage sector as your vertical, then you will hold the top 10% of the companies in that sector. A company such as Coca-Cola, PepsiCo, Nestle, or Hershey would be included in your portfolio.
When you short-sell a stock, you sell the shares that you don’t own and simultaneously agree to buy them back at a lower price in the future. You “borrow” the shares of the company you want to “short sell” for a certain period of time, for example, 14 days. Then, if the price of the stock drops, you can buy it back and pocket the difference between your initial investment and the amount you sold it for. So, the profit you make depends on the price drop of the stock you shorted. If the price of the stock goes up, the amount you have to pay back to the broker is also going up. When you short a stock, you are essentially borrowing shares and agreeing to buy them back at a later date at a lower price. So, you have to have shares to short sell, and once the stock drops in price you have to buy them back at a higher price.
Covered call options
Covered call options are like regular call options, but you make the option contract in advance. It means that you buy a call option and sell the shares you own. You make a profit from the upside movement of the stock and get the dividends from the underlying stocks. But there is a risk that the price movement of the underlying stocks makes your call option worth nothing. In that case, you lose your investment. Also, an investor has to be very well-informed about the stock market and its trends to make money from call options successfully.
Strategies based on options
Investors can profit from a rise in the price of a stock by buying put options. A put option gives you the right to sell the underlying stock at a fixed price. So if the price of the stock goes down, you make money. You can hedge the risk of a substantial rise in the price of the underlying stock by selling a call option. A call option gives you the right to purchase the underlying stock at a specified price. So, if the price of the underlying stock goes up, you can buy the shares at a lower price and make money.
Wrapping up There are lots of ways to make money from stocks and options are one such way. Investors can buy put options or call options that give them the right to sell stocks at a set price in the future. They can also sell shares and buy back the shares at a later date to make a profit. Vertical trading is another options strategy that allows investors to profit from both price appreciation and dividends by holding a few stocks in the same vertical. There are many other option strategies, but these are some of the most popular. Now that you know what options are and how you can use them to make money, it’s time to get started!