Top 5 Option Trading Strategies a Trader Must Know!
Options trading is a popular choice among traders wanting to invest in derivatives. Options are derivative contracts that give the right but not the obligation to execute the contract to the buyer/seller depending on whether it is a call option or a put option.
Often options traders use options strategies to make their trade efficient. Also, there are more than 400 option trading strategies that traders can implement as per their requirements. If you also want to start trading options and learn option trading strategies, this article is for you. Here are five strategies to kickstart your options trading journey.
5 Option Trading Strategies To Know
While these strategies are straightforward and can give you decent returns, remember that they are not risk-free. Here are five simple trading strategies that can allow you to hedge the risk, bet on market movements, and enhance returns for trading options contracts.
1. Long Call & Long Put
This is one of the simplest strategies for option trading. In this, a trader buys an option call of an underlying asset and expects it to increase in value from the strike price before the expiration. In a long put, a trader buys a put option and expects the value of the underlying asset to decrease below the strike price before expiry. The upside of these strategies is that the trader can execute them easily irrespective of their level of expertise.
2. Covered Call
A covered call involves short-selling the options with a twist. Here. traders buy an underlying asset and sell call options of the same asset to hedge their risk. Traders sell call options and simultaneously purchase the same value of the underlying asset. As a result, if the option buyer decides to execute the contract, the option seller can sell his position in the underlying asset to “cover” the contract.
3. The Butterfly Spread
The butterfly strategy is a neutral strategy that gains from the price movement of the underlying asset in either direction. It involves purchasing one call at a lower strike price, selling two calls at a higher strike price and then buying one more call at an even higher strike price.
Remember that all calls must have an equidistant strike price and the same expiration date. This is a good pick for traders who want to limit their profit and loss to the money they have put in.
4. Long Strangle & Short Strangle
This is a combination strategy used in options trading for traders who expect the price of the underlying asset to move significantly but don’t know in which direction. In long strangles, call and put with different strikes but the same expiration date is bought. In short strangles, the same call-and-put options are sold at either the strike price (At The Money) or Out of The Money.
This combination is useful if you expect the volatility to increase or the underlying asset to move over the implied volatility. Based on the market view, bullish or bearish, a long or short-strangle strategy can be implemented.
5. Married Put
A married put is useful if you are holding a long position in your underlying security. The trader buys an At-The-Money put option on the same asset he/she is holding. It is suited for traders who expect the asset price to rise but also need protection against downfall if the market does not move their way.
Option trading is one of the ways for traders to earn profit from the market. For that, option trading strategies are an excellent tool as they hedge risk and increase the chances of profit. If you are trading options, you must take the time to learn the aforementioned strategies.