Have you heard much about options trading but need help figuring out where to begin? Great news. Trading options is an accessible way to speculate on the stock market and potentially take advantage of movements in underlying asset prices.
In this article, we’ll dive into seven popular options trading strategies that span across different risk profiles and skill sets – so no matter who you are or your comfort level with options trading, there’s a strategy that should work for you. With our guidance and information, you, too, can explore all the opportunities out there in stock-options markets.
Covered call
Covered call options trading is the perfect strategy for those looking to make an effective, low-risk investment. This strategy takes advantage of the limited upside potential and reduced risk seen in holding a long position in a stock. It provides increased income by having an investor write (sell) a call option while they retain full ownership of the underlying security.
By writing a covered call option, the investor can generate even more income over time due to limited downside risk or unlimited upside potential depending on how high or low the underlying security moves relative to their predetermined price. If done correctly, investors can potentially do well while limiting risk exposure.
Bull put spread
Bull put spreads are another popular options trading strategy, especially for those with a moderate risk appetite. This strategy involves simultaneously buying and selling the same number of put options at different prices, which limits potential losses and increases potential gains as long as the underlying security remains above the lower strike price.
The key to a triumphant bull put spread is identifying security with limited downside risk, and it enables investors to purchase higher-priced puts while simultaneously selling lower-priced ones. If done correctly, this will often lead to more returns than losses.
Bear call spread
The bear call spread is the opposite of a bull put spread, and it takes advantage of the limited downside risk associated with holding a short position in a stock. This strategy involves simultaneously buying and selling an equal number of call options at different prices, which limits potential losses while increasing potential gains as long as the underlying security remains below the higher strike price.
The key to a successful bear call spread is identifying underlying security with limited upside potential. It will enable investors to purchase lower-priced calls while simultaneously selling higher-priced ones. If done correctly, it can often lead to more returns than losses over time.
Long straddle
The long straddle options trading strategy is best for those with a higher risk appetite, as it involves purchasing both a call and put option on the same underlying security for the same strike price and expiration date. This strategy allows investors to take advantage of limited downside risk while having unlimited upside potential if the underlying security moves significantly in either direction.
When using this strategy, it’s crucial to understand volatility and market direction to better time your trades for the maximum advantage without incurring too much loss.
Short strangle
The short-strangle options trading strategy is similar to the long-straddle but involves a slightly different approach. This strategy involves selling both a call and put option on the same underlying security for the same strike price and expiration date.
This strategy allows investors to take advantage of limited upside potential and unlimited downside risk if the underlying security moves significantly in either direction. When using this strategy, it’s crucial to understand volatility and market direction to better time your trades for maximum gains without incurring too much loss.
Long call butterfly spread
The long call butterfly spread is another popular options trading strategy involving simultaneously buying and selling calls on the same underlying security at three strike prices. This strategy allows investors to take advantage of limited downside risk while having unlimited upside potential if the underlying security remains above the higher strike price.
The key to a successful long-call butterfly spread is identifying underlying security with limited movement. It will enable investors to purchase lower-priced calls while simultaneously selling higher-priced ones, and this can often lead to more returns than losses over time if done correctly.
Short put butterfly spread
The short put butterfly spread is the opposite of the long call butterfly spread, and it takes advantage of the limited upside risk associated with holding a short position in a stock. This strategy involves simultaneously buying and selling puts on the same underlying security at three different strike prices, which limits potential gains while increasing potential losses as long as the underlying security remains above the higher strike price.
The key to a successful short-put butterfly spread is identifying underlying security with limited movement. It will enable investors to purchase lower-priced puts while simultaneously selling higher-priced ones, and this can often lead to more returns than losses over time if done correctly.