In the past few years, there have been highly diversified options trading strategies introduced. When used properly, traders can get awesome results. It helps to diversify, grow and protect their position. Options are the right tool for position trading and risk management. The key is to find appropriate strategy and use it to gain the edge.
Top Options Trading Strategies
- Long Call – It is a basic option trading strategy, which is easy to understand. Aggressive traders feeling bullish about an underlying asset can buy calls to capture the potential upside with limited risk to their premium. If prices move as predicted, then the potential profit is unlimited.
- Short call – Short call strategy is opposite to long call. When the market is bearish and the underlying instrument is expected to fall, this strategy is adopted. Potential profit is limited and there is a large loss if the price moves upwards rather than the downside.
- Long put – When the market is bearish, you buy a long-put option, which can be sold at pre-determined
price. Thus, the risk is limited.
- Short put – The investor short sells a put when he feels bullish or expects the price to increase. If the price rises above the strike price, the seller makes the profit. If the price falls below the strike price then the seller starts to lose more money than the premium. Here the potential loss is limitless.
- Long straddle – It is a neutral option trading strategy, which involves buying put and call simultaneously of the same underlying instrument. The expiration date and the strike price are the same. With long positions, you can achieve great profits from both the direction of price movement. The only condition is that the movement needs to be strong.
If the stock price increases, the call is executed, while the put expires without value and vice versa. Either way, the volatility of the underlying asset helped to cover the trade costs and profits made. In case, the prices remained between lower and upper breakpoints, then you endure losses to that amount.
- Short straddle – When traders feel the market is not volatile, they sell a put and call on the same underlying asset for the same strike price and expiry date. If the call or put does not get executed the trader retains his premium [upfront money]. If the prices stir up or down significantly, then the investor can lose significantly.
- Long strangle – Investor buys an OTM call and put option, at the same time on the same stocks with the same expiration date. It is used when the investor experiences large price movement but is not sure about the direction. Strangles are less expensive than the straddles because it was an out-of-the-money purchase.
- Long call butterfly spread – Investor combines a bear and bull spread strategy. Three different strike prices are used for the same asset and expiry date. The strategy is used, when traders feel that the asset price will not move a lot until expiration.
- Iron condor – Investor will simultaneously hold the bear call and bull put spread with the same width. This strategy helps to exploit the stocks that experience low volatility.
Iron butterfly, protective collar, married put, covered calls, etc. are also great option trading strategies. You can take help from options trading service to get educated on how to use the varieties of strategies properly.