When done perfectly, trading options are one of the most effective ways to build capital over the long haul. In return for a premium that the stock buyer pays back the seller, an option contract allows a trader to purchase or sell an asset, like a stock or an index, at a certain price over a specific period. So, let’s discuss the best option trading strategies.
Best Option Trading Strategies
1. Bull Call Spread
Two call options with differing strike prices are combined to produce a range in a bull-call spread. The expiration date and underlying asset of both options are the same. On the other hand, the traders and investors purchase one At-The-Money call option and simultaneously sell one Out-Of-The-Money call option.
Additionally, an investor can earn from a bull call spread if the underlying asset, such as stocks, sees an increase in value. With this technique, a loss occurs if the stock price drops and the profit is restricted to the spread minus net debit.
2. Long Call
This is the most straightforward strategy, which involves purchasing a call at the strike price that you believe will be lower than the spot price on the expiry date. For instance, buying a call option at a strike price that is lower than INR 1000, such as INR 900.
On the other hand, if the price of the spot on the expiry date is ?1,000, then you can buy the underlying asset at ?900, which you can get from the call option, and sell it for ?1,000 in the spot market.
3. Synthetic Call
To initiate a Synthetic Call, commonly referred to as a Synthetic Long Call, an investor buys and retains shares. The investor additionally purchases an at-the-money put option on similar shares as a hedge against a drop in the stock's price.
For many investors, this approach is like having insurance against a big decline in the stock price while they are still holding shares.
4. Long and Short Strangles
The options strangle technique is akin to the straddle option technique, but the difference is that it involves buying Out-of-the-money call and put options. In the long strangle position, a trader purchases two puts and calls with the same strike prices but as far OTM as possible. The upside is unlimited, while the maximum downside is limited by premium.
Short-straddle refers to one Out-Of-The-Money put and one Out-Of-The-Money call option, which is sold. The max profit is a premium amount, while the max loss is unlimited.
5. Strip
The Strip Strategy must be used by an investor who is both pessimistic about the direction of the market and positive about volatility. Part of this technique includes purchasing two lots of "At-the-Money Put Options" and "At-the-Money Call Options." Both choices require the same expiration month and underlying security. Comparable to a bearish variant of the strip is the standard long straddle.
When the underlying asset makes a big move at expiration and moves more favorably in the direction of loss, the strip strategy may yield large winnings.
6. Long and Short Iron Condor
The strategy is considered to be one option, which contains one long and one short put and one long and one short call with different strike prices but the same expiration date. Unlike bull put spread, the iron condor strategy is a four-legged strategy that has limited risk and helps investors, inventors, and traders to profit from the low volatility in the market.
It is when the price of the underlying asset is between the middle strike price in the expiration time with high profit.
7. Breakout Strategy
Timing is no doubt one of the essential considerations when buying and selling stocks on the same day. Getting the shares that have moved outside of their typical trading range is one of the first steps in this option selling intraday method.Also Read: 5 Intraday Trading Tips
Alternatively, a trader can determine whether equities are ready to enter the latest price range. Put differently, it is the responsibility of traders to identify the thresholds at which share prices rise or fall. Moreover, intraday traders may think about taking on long positions and buying shares if the stock cost rises above the cutoff point.
Nevertheless, when stock prices go below this barrier, it's a sign that people should think about taking on short positions or selling shares.
The Bottom Line
Unlike other types of options, basic options trading strategies involve low risks. Hence risk-averse traders too can employ options to boost their total returns. That being said, keeping in mind the ‘pull’ to any investment, you should also know how much risk you are getting yourself into so that you can assess whether such risk is worth taking.