Options Trading Strategies
Options Trading Strategies – Option strategies are simultaneous, and often combine buying or selling one. More options that differ in one or more variables. This is often done to leverage exposure to a particular type of opportunity or risk. While eliminating other risks as part of a trading strategy. Literally, a strategy can simply be buying or selling one option, however, option strategies often combine buying and selling multiple options at the same time.
Option strategies allow you to profit from trends such as bullish, bearish or neutral. In the case of neutral strategies, they can be divided into those that are bullish in volatility and those that are bearish in volatility. The options positions used can be long and / or short positions in call options.
Bullish options strategies
Bullish options strategies work when an option trader expects the price of a stock or other asset to move higher. It is necessary to assess how high the asset price can go and the time frame in which this will occur in order to choose the optimal trading strategy.
The most bullish trading strategy option is the simple call-option buying strategy used by most of the novice option traders.
Stocks rarely go up by leaps and bounds. Moderately bullish option traders usually set price targets and use bullish spreads to reduce costs. (This does not mitigate risk, though, because the option may still end in nothing.) Although the maximum return is limited for these strategies. They are usually less costly if they fail when used for a given nominal number of investments. Bullish call spread and bullish put spread are examples of moderately bullish strategies.
Soft bullish trading strategies are option strategies that make money until the underlying stock price drops by the option’s expiration date. As such, these strategies can provide little protection against risks. Cashless covered call options are a good example of such a strategy.
Bearish options strategies
Bearish options strategies work when an option trader expects the stock price to move down. It is necessary to assess how low the stock price can go and the time frame in which the decline will occur in order to choose the optimal trading strategy.
The most bearish of the option trading strategies is the simple put-buying strategy and is used by the majority of novice option traders.
Stock prices only occasionally make steep downtrends. Moderately bearish option traders typically set a price target for the expected decline and use bearish spreads to keep costs down. While maximum profits are limited for these strategies, they are also less costly in the event of failure. Bearish call spread and bearish put spread are examples of moderately bearish strategies.
Soft bearish trading strategies are option strategies that make money until the stock price rallies by the expiration date of the option. As such, these strategies can provide little protection against risks. In general, bearish strategies generate lower profits with less risk of losses. Rather, the correct use of a neutral strategy depends on the expected volatility in stock prices.
Examples of neutral strategies are:
- Guts – Sell ITM (in money) put and call.
- Butterfly – buy ITM (in the money) and OTM (out of the money) call option. Sell two ATM options (near the money), or vice versa.
- Straddle – hold positions in both call and put options with the same strike price and expiration date. A long straddle is profitable if the price of the underlying asset changes significantly, higher or lower. A short straddle is beneficial when there is no such significant change.
- Collar – buy the underlying asset and then simultaneously buy a put option below the current price (floor). And sell a call option above the current price (cap).
- Fence – buy the underlying asset and then simultaneously buy options on both sides of the price to limit the range of possible returns.
- Iron Butterfly – Sell two overlapping credit vertical spreads. But one of the vertical spreads is on the call side and the other is on the put side.
- Iron Condor – Simultaneous purchase of a put spread and a call spread with the same expiration date and four different strike prices.
- Jade Lizard – Create a bullish vertical spread using call options. With the addition of selling a put option at an exercise price lower than the call spread’s exercise price in the same exercise cycle.
- Volatility bullish options strategies are neutral trading strategies that generate bullish gains on volatility when the underlying stock price swings significantly up or down. These include the long straddle, long strangle, short condor, and short bow tie.