Several well-known options strategies are accessible, each of which allows financial market traders to take a position with a specific market viewpoint. Options strategies can also assist investors in protecting or increasing the return on an underlying position.
This post briefly summarises the most acceptable trading methods that anybody interested in utilizing options should be aware of.
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The following trade strategies are among the most common. If you have the power to execute, you can understand and use them. These include using only one or more options with a single expiration date.
This strategy is used when bullish on the underlying stock. A long call option gives you the right to buy a certain quantity of shares at a fixed price, called strike price, by a predetermined date.
The advantage here is that if the market moves in your favour and the stock price increases significantly above the strike price, their value will also increase.
The disadvantage is that this strategy costs money because you must pay premiums (costs) for buying options and if they are worth less when they expire, you lose all the premium paid.
This strategy has unlimited downside risk but only limited risk if things don’t go as planned. A naked call option gives you the right to sell a certain quantity of shares at a fixed price, called strike price, by a predetermined date. This strategy is used when bearish on the underlying stock, and it involves unlimited risk if the market moves against you.
The advantage here is that if things don’t go as planned and the stock price stays flat or declines somewhat, you avoid all losses from this position. On the other hand, if your plan fails and the stock price increases significantly above the strike price, their value will increase as well and then be assigned to you at the expiration of this option contract.
This strategy involves selling call options against long underlying securities to collect premiums (i.e., the calls options premium collected) while at the same time benefitting from downside protection on your long underlying positions. Use when you are neutral on the underlying stock or somewhat bearish if you already have a short position in the underlying stock. It involves unlimited risk if things don’t go as planned.
This strategy is employed when market participants are bullish on the underlying security. Still, they either do not want to buy at current prices or cannot afford to buy at current prices—the bull call spread brings a limited risk of loss for an upside move. With a bear put spread, one can benefit by selling put options that are in the money to collect income while at the same time benefitting from downside protection on your long underlying position.
Use these strategies when market participants expect the price of an underlying security to move in a particular direction. They can be employed by investors and traders alike when they want or need to take specific directional views concerning that underlying security.
You may experiment with a variety of trading methods by increasing your knowledge of the options market. You may also diversify your trading tactics as we advise investors to diversify their portfolios. Consider looking at other alternative options, such as:
- Iron Condor: You hold a bull put and a bear call spread simultaneously.
- Iron Butterfly: Repeat the process as a form of protection while selling an at-the-money put and buying an out-of-money put.
- Long Strangle: At the same time, you may buy and sell a put and a call that are both out of money.
- Long Straddle: At the same time, you may purchase a put and call option.
- Protective Collar: Buying an out-of-money put and an out-of-money call simultaneously is a way to preserve some premium.
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