Traders often venture into options trading with little knowledge of the available of options strategies. Numerous options trading strategies maximize returns while limiting risks. Options traders can learn how to leverage the power and flexibility of stock options.
Read on to understand some of the options trading strategies you should beware of.
A covered call is a financial transaction where an investor trading call options possesses the same volume of the underlying bond. To apply a covered call, a trader owning a long position in a resource sells call options on the same asset to create a flow of income.
One game plan when it comes to calls is to purchase a bare call option. You can also develop a buy-write or a standard covered call. For example, assuming a trader is utilizing a call option on a share that depicts 100 stock shares per every call option.
In every 100 stock shares that the trader purchases, they would concurrently trade one call option against it. This strategy is used because it increases income and limits the risk of holding the stock for a long time.
The trade-off here is that a trader must be ready to dispose of their shares at a fixed price, or the strike price. Why the name covered call? It is because, in case of a rapid price increase, the trader’s long stock position will cover their short call.
The Bull Call Spread
In the bull call spread strategy, a trader purchases calls concurrently at a particular strike price while trading a similar amount of calls at an increased price. Both of these call options have the same underlying asset and expiry date. This strategy features a vertical spread trend.
Often, it is used when a trade is bullish on the underlying resource and forecasts a steady rise in the asset price. With this strategy, a trader can reduce the net premium spent and also restrict their upside on the trade.
In the married put strategy, a trader buys an asset like shares of stock and goes ahead to buy put options for the same amount of shares. Each contract has a value of 100 shares, and the bearer of a put option can choose to trade stock at the strike price.
A trader can use the married put strategy to safeguard their downside risk when in possession of the stock. This strategy works in the same way as an insurance policy. It sets up a price floor in case the stock price depreciates sharply. For example, a trader purchases 100 shares of stock and goes ahead to buy one put option concurrently.
This strategy will be ideal for this trader because they are safeguarded to the downside in case there is instability in the price of the stock. Further, the trader can take part in each upside opportunity in case the stock grows in value. The only downside of this strategy would happen if the stock value does not fall, then the trader loses the total premium amount of the put option they paid.
Bear Put Spread
The bear put strategy is a vertical spread where a trader buys put options concurrently at a specific strike price. The trader also sells the same amount of puts at a reduced strike price.
Both of these options are bought for a similar underlying asset and come with the same expiry date. This strategy comes in handy when a trader has a bearish attitude regarding the underlying asset and forecasts a price decline of the asset. It offers limited gains and losses.
A long straddle options trading strategy occurs when a trader buys a put and call option concurrently on an equivalent underlying asset. The underlying asset comes with the same expiry date and strike price.
A trader can use this strategy if they feel the underlying asset’s price will shift out of a particular range significantly. This strategy gives the trader a chance to make unlimited gains.
These Strategies will Improve Your Trading
Master these skills before venturing into live options trading to maximize your earnings and limit your risk.
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