Gain an Edge with These Effective Options Trading Strategies
Each options strategy fits a different market view: bull call spreads for a moderately rising stock, bear put spreads for a moderately falling one, calendar spreads and covered calls when you expect little movement, protective puts to limit losses on stock you own, and straddles or strangles when you expect a large move in either direction. No strategy guarantees an edge; each trades some potential profit for defined risk or income. This article summarizes how each works and is educational, not investment advice. It covers common options trading strategies, both advanced and basic, including Bull Call Spreads, Bear Put Spreads, Calendar Spreads, Covered Calls, Protective Puts, Strangles, Straddles, Risk Reversals, Guts, Butterflies, Iron Condors, Condors, Vertical Spreads, Long Options, Short Options, and Multiple Leg Option Strategies.
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Bull Call Spreads
The Bull Call Spread is a popular strategy that involves buying and selling options of the same underlying stock or index. The basic strategy involves buying a call option with a lower strike price and selling a call with a higher strike price. This strategy limits risk: the maximum loss is the net debit paid (the premium of the lower strike call minus the premium received for the higher strike call), and the maximum profit is the difference between the strikes minus that net debit. To learn more about Bull Call Spreads and how to use Excel to trade it, you can follow this link.
Bear Put Spreads
The Bear Put Spread is the opposite of the Bull Call Spread. This strategy involves buying a put option at a higher strike price and selling a put option at a lower strike price with the same expiration. The goal of this strategy is to capitalize on a decrease in the underlying security’s price. The maximum loss is limited to the net debit paid, and the maximum profit is the difference between the strikes minus that net debit. To learn more about Bear Put Spreads and how to use Excel to trade it, you can follow this link.
Calendar Spreads
Calendar Spreads are another very effective options trading strategy. This strategy involves buying and selling options on the same underlying asset, with the same strike price, but with different expiration dates. The goal of this strategy is to take advantage of time decay and generate a profit without the underlying asset moving.
Covered Calls
The Covered Call strategy is a popular options trading strategy used by investors to generate income. This strategy involves writing a call option on a security that you already own. By writing the call, you agree to sell your stock at the option’s strike price in the event that the option is exercised by the buyer.
Protective Puts
Protective Puts is an options trading strategy used by investors to help reduce losses when investing in a security or index. This strategy involves buying a put option on a security you already own, with an expiration that covers the period you want to protect. The put option gives the investor the right to sell the security at the option’s strike price, regardless of the market price.
Strangles
A long strangle involves buying an out-of-the-money put and an out-of-the-money call on the same underlying security with the same expiration but different strike prices. The goal of a strangle is to profit if the security moves sharply in either direction.
Straddles
A long straddle involves buying a put and a call on the same underlying security with the same strike price and expiration. The goal of this strategy is to profit if the security moves significantly in either direction.
Risk Reversals
Risk Reversals are similar to Straddles, but are implemented differently. This options trading strategy involves writing a put option and buying a call option on the same underlying security with different strike prices. The goal of this strategy is to profit if the security moves in the direction of the call option.
Guts
A long guts strategy involves buying an in-the-money call and an in-the-money put on the same underlying security with the same expiration. The goal of this strategy is to profit if the security moves sharply in either direction.
Butterflies
Butterflies are options trading strategies that use three strike prices on the same underlying security and expiration. A long call butterfly buys one lower strike call, sells two middle strike calls, and buys one higher strike call, and profits most if the stock ends near the middle strike.
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