If you intend to start trading, learning the different options strategies of trading is important. Understanding options trading strategies will teach you how to optimise options as a trading vehicle. So, let’s look into the top 10 options trading strategies that can help you limit the risks and maximize returns.
- Covered Call or Buy-Write Strategy
Here, you can directly purchase assets and write or sell a call option on these assets simultaneously. This can help you accumulate additional profits (through proceeds of the call premium) and safeguard you against a possible drop in the underlying asset’s value. You can adopt this strategy when you have a short-term position and a neutral opinion on the assets. Please note that the volume of assets owned should be equivalent to the number of assets underlying the call option.
- Married Put Strategy
The married put strategy works like an insurance policy and can be used to establish a floor if asset price drops dramatically. It should be opted for when you are both confident in the asset’s price and wish to protect yourself against potential short-term losses. In this strategy, you can purchase a put option for a corresponding number of assets you currently own or purchase.
- Bull Call Spread Strategy
One of the easiest strategies, bull call spread strategy, can be practiced when you are bullish and expect a moderate rise in the price of the underlying asset. All you have to do is buy call options at a certain strike price and simultaneously sell the same number of calls at a better strike price. Do note that both call options will have the same expiration month and underlying asset.
- Bear Put Spread Strategy
The bear put spread strategy is very similar to the bull call spread strategy. In this strategy, you are bearish and expect the underlying asset’s price to decline. You simultaneously purchase put options at a certain strike price and sell the same number of puts at a lower strike price. Both the options would be for the same underlying asset and also have the same expiration date. This way you face limited gains and limited losses.
- Protective Collar Strategy
Under this strategy, you purchase an out-of-the-money put option and write an out-of-the-money call option simultaneously, for the same underlying asset. Employ this strategy when a long position in a stock has experienced substantial gains. In this way, you can lock in profits without selling your assets.
- Long Straddle Strategy
This strategy should be opted for when you are confident that the underlying asset will move considerably but are unsure of which direction the move will take. So, you purchase both a call and put option with the same strike price, underlying asset, and expiration date simultaneously. This way, you maintain unlimited gains and limit the loss to the cost of both options contracts.
- Long Strangle Strategy
Similar to the long straddle strategy, this one is effective when it seems that the underlying asset’s price will experience a large movement, but you are unsure of which direction the move will take. So, you purchase a call and put option with the same maturity and underlying asset, but with different strike prices. Typically, the put strike price will be below the strike price of the call option. Both the options will be out of the money. By adopting this strategy, you limit the losses to the costs of both options because the options are purchased out of the money.
- Butterfly Spread Strategy
In this type of strategy option, you need to combine a bull spread strategy and a bear spread strategy and use three different strike prices. So, you purchase one call (put) option at the lowest (highest) strike price, sell two call (put) options at a higher (lower) strike price, and one last call (put) option at an even higher (lower) strike price.
- Iron Condor Strategy
Iron condor strategy is wherein you simultaneously hold a long and short position in two different strangle strategies. It’s a fairly complex strategy that requires time to learn, and practice to master.
- Iron Butterfly Strategy
You combine either a long or short straddle with the simultaneous purchase or sale of a strangle in the iron butterfly strategy. This one uses both calls and puts, as opposed to one or the other, so profit and loss are both limited within a specific range, depending on the strike prices of the options used. This strategy is used to cut costs and limit risk.