You may not have been aware of it previously, but several decisions and strategies have the potential to bring great rewards with minimal drawbacks. As a trader, you can take advantage of the various trading options available with little effort, time and knowledge.
Here I have made a list of many options trading strategies with their details that you can use and apply while trading; have a look and decide which one fits right with you.
Bullish Options Strategies
1. Covered Call
One of the very popular strategies is covered call, the reason being, it reduces risk and generates income. Here, the trade-off is that you must be willing to sell your shares at an already set price, which is called the short strike price. For the execution of this strategy, what you need to do is just purchase the underlying stock as you would normally, and write or sell a call option in its name simultaneously on the same shares.
Let’s understand it with an example. Let’s say that an investor is using a call option on a stock that represents 100 shares of the stock per call option. So, here, for every 100 shares of stock that an investor would buy, they would have to sell one call option for it simultaneously.
The reason that this strategy is called a “covered call” is that in the event that the stock price increases rapidly, the investor’s short call is covered by the long stock position.
2. Bull Call Spread
This one is unique in that the investor purchases a call at a specific strike price while simultaneously selling the same number of calls at a higher strike price. Hence, both the call options will have the same underlying asset as well as the same expiration date.
This options trading strategy is used when the investor is optimistic and expects a moderate asset price rise.
This strategy limits the trade’s upside potential and reduces the net premium paid.
From the graph above, I assume you will be able to identify that this is a bullish strategy. In this case, the trader requires an increase in stock prices to make a profit and successfully implement this strategy.
3. Bear Call Spread
Following the bull call spread approach, we have the bear call spread, also referred to as the bear call credit spread. When an investor anticipates a drop in the underlying asset, he or she will purchase call options with a certain strike price. And at the same time, the investor will sell the same number of calls with the same expiration date but at a lower strike price.
4. Married Put
In this option strategy, the investor purchases an asset of any type, and with it, he or she also purchases the put option for an equivalent number of shares. Each contract is worth 100 shares, and the put option holder can sell the stocks at the put price.
Investors employ this tactic primarily as a means of mitigating the negative effects of stock market volatility. This strategy, dubbed protective put, operates like an insurance policy.
Bearish Option Trading Strategies
5. Bear iron condor spread
The short iron condor spread is a four-trading strategy consisting of a bear call spread and a bull put spread, with a short put strike lower than a short call strike. The same date is the expiration date for each selection.
The maximum exposure is equal to the strike price of the bull put spread (or bear call spread) minus the net credits received. Your maximum profit potential is equal to your net balance received minus your commission.
6. Bear Put Spread
Bear Put Spread, another type of vertical spread, is one of the most popular and often employed option strategies. The investor buys a put option at one strike price and sells the same quantity at a lower strike price. In this case, both options are for the same asset and expire on the same date.
When the trader has a negative view of the underlying asset and thinks that its price will go down, these options trading strategies are used. The trader benefits in this case from both limited loss and limited profit.
The bearish strategy, seen above, requires stock prices to decrease.
Neutral Options Strategies
7. Long Straddle
Another one of the best options trading strategies is the Long straddle. This type of strategy takes place when the investor simultaneously purchases a call and put it under the same underlying asset with the same strike price and the same expiration date as well. An investor employs this approach when they believe the price of the underlying asset will move dramatically outside of a certain and pre-assumed range, but they are unsure of the direction in which the price will move.
If we look at it theoretically, this type of strategy gives the investor a chance to earn unlimited profits. However, an investor can lose no more than the total price of the options contracts.
8. Long Strangle
The trader buys a call and puts options with different strike prices after a long straddle. The expiration date and underlying assets are the same, but there are out-of-the-money call and put options. This is the optimal strategy for trading options when the trader knows the price movement but not the direction.
9. Long Call Butterfly Spread
In the previous strategies, you must have noticed how they all required two different position combinations. However, a long-call butterfly spread requires both bull and bear spread methods. The investor will also employ three strike prices, but the expiration date and underlying asset will remain the same.
In the image above, you can notice how the maximum amount of gains are made when there’s no change in the stock till its expiration at the point of the money strike.
So these were some options trading strategies you can use and apply while trading. For each of these, all you need to do is know when and how to apply.