Options trading varies significantly from equities trading. Stocks give traders a particular piece of ownership in the company, but options are just contracts comprising the right to sell or buy stocks at the strike price on specific expiry dates.
Puts and calls are two basic types of options. Buying call options grants the right but doesn’t obligate purchasing any index or stock at the strike price any time before the expiry of options. Similarly, traders have the right but not any obligation to sell the index or stock at the strike price before the expiration date.
Trading options is a zero-sum game, similar to placing horse racing bets. The options seller’s loss is the options buyer’s gain and vice versa. Buying or selling puts or calls options or both together is often done to gain unlimited profits or limit losses. Different bearish, bullish, and neutral options trading strategies can enhance the outcomes.
Experts at Trading Alphas highlight some of the top strategies for options trading beginners. For more information or advice, you can reach out to the professionals or join their trading Discord server. It’s a platform where traders help traders with real-time signals, trading chart patterns, trading strategies, and a lot more.
Strategy #1- Bull Call Spread
As one of the bullish strategies, a bull call spread involves buying an At-The-Money call option and selling an Out-of-Money call option. The strategy helps make profits when the underlying stock’s price increase is equal to the spread minus net debit. Therefore, both calls must have the same expiration date and the underlying stock. When the stock price falls, a loss is incurred.
The Spread here refers to the difference between the lower and higher strike price. Net Debit equals the received premium for a higher strike minus the premium paid for a lower strike. The strategy helps protect when the profit is limited, and the prices fall.
Strategy #2- Bull Put Spread
The strategy can be achieved by combining two same-type options. An option is bought at a strike price while another is sold at a higher price. The strategy is useful when traders are bullish on the movement of an underlying asset.
Bull put spreads are formed for net amounts, or credits received and incurred profits from an increasing stock price limited to the received net credit. Meanwhile, the potential loss occurs when the stock’s price falls below the long put’s strike price, so it’s often limited.
Strategy #3- Call Ratio Back Spread
It’s one of the simplest strategies which can be implemented when traders are bullish on indexes or stocks. Traders make limitless profits when markets go up, but the profits get limited when the market is down. The losses occur when the market stays within a particular range. So traders make profits when markets move in either direction.
Strategy #4- Synthetic Call
The strategy is popular among traders who have a bullish view of the long-term stock but are concerned about the downside risks, too. It holds unlimited potential profits, but the risk is limited. It involves buying put options, and traders make profits if the underlying price increases. But if the price falls, the loss is limited to the paid premiums.
Strategy #5- Bear Call Spread
Traders with a moderate bearish view of the market often implement the bear call spread as one of the two-leg bearish strategies for options. It involves buying call options at a higher strike price and selling it at a lower strike price.
The calls must also have the same expiration date and underlying stock in this scenario. Bear call spreads are based on net credits, so profits occur when the prices of stock fall. The losses are limited to spread minus net credit, whereas the potential profits are to the net credit.
Strategy #6- Bear Put Spread
Traders implement the strategy when the market view is moderately bearish. This implies the scenario when the market is expected to go down, but not a lot. It involves buying ITM options and selling OTM ones. It’s formed for the net cost or net debit and profits when the price of underlying stocks falls.
Strategy #7- Strip
This neutral to bearish options strategy involves selling two put contracts and buying one call puts at the same strike price. Compared to a long strangle, a long strip is a more bearish approach as two puts are involved. Traders make profits when the underlying stock’s price makes a powerful move in the down or up direction at the expiration time. Generally, more profits are made when the prices move downward.
Strategy #8- Synthetic Put
The synthetic put strategy can be implemented when investors are concerned about near-term strength because of a bearish view of the stock. The profit is made when there’s a decline in the price of underlying stocks, which is why many refer to it as the synthetic long put.
Strategy #9- Short and Long Strangles
Strangles and straddles are similar, but the primary difference is that strangles is achieved by combining the OTM put options with similar call options transactions at a higher strike price, whereas straddles require ATM put and call options.
Long strangles are favorable when the prices are expected to move in either direction substantially. Short strange fetches profits when the prices are stable.
Maximum loss equals the net premium flow, and profits are unlimited in long strangles. Meanwhile, with short strangles, the maximum loss is unlimited when the price falls or rises, and the profit equals the total premium received.
Strategy #10- Short and Long Butterfly
This neutral options strategy combines bear and bull spreads with limited profit and fixed risk. The options with lower and higher strike prices have the same distance from the ATM options.
The long butterfly strategy involves writing two ATM call options and buying one OTM and one ITM call option. Meanwhile, the short butterfly spread strategy requires buying two ATM call options and selling one ITM and One OTM call option.
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