What are Option Trading Strategies?

Option strategies are simultaneous and are often mixed, buying or selling of one or more options that differ in one or option’s variables. For instance, a call option is simply known as calls, which gives the buyer a right to buy a particular stock at that option’s strike price.

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There are many strategies available that limit risk and maximize return. With little efforts, traders can easily learn how to take advantage of the flexibility and power options offer.

What are the 7 options strategies that every trader must know?

1) Covered call

This is a very popular strategy as it generates income and reduces some risk of being long stock alone. The condition for the trade is that you must be willing to sell your shares at a set price, which is the short stock price. The execution is quite simple, you purchase the underlying stock like you normally do, and simultaneously write (or sell) a call option on the same shares. For instance, on every 100 shares of stock bought, 1 call option is simultaneously sold against it. This is a covered call because if the stock rocket higher in price, your short call is covered by the long stock position. This strategy is particularly used when investors have short term position in the stock and a neutral opinion on its direction.

2) Married Put

In a married put strategy, the investor purchases an asset and simultaneously purchases put options for an equivalent number of shares and get the right to sell stock at the strike price. This strategy is just like an insurance policy and establishes a protective price floor, in case the stock falls sharply. So, investors buy 100 shares of stocks and buy 1 put option simultaneously. This is an appealing one because it protects from the downside of a negative event.

3) Bull Call Spread

In this one, the investor buys the calls at a specific strike price and sells the same number of calls at a higher strike price, both the calls have the same expiration and underlying asset. This is a vertical spread strategy used in the case when an investor is bullish on the underlying and a moderate rise is expected at the price of an asset.

4) Bear Put Spread

The bear put spread strategy is another form of vertical spread. This one is executed by the investor simultaneously purchasing put options at a specific strike price and sell the number of puts at a lower strike price, again both having the same underlying asset and the same expiration. This is implied when the trader is bearish and expects a decline in the price of the underlying asset.

5) Protective collar

This strategy is performed by purchasing an out of the money put option and simultaneously writing an out of the money call option for the same underlying asset and expiration. It is generally used by investors after a long position in a stock has experienced substantial gains. This combination is best because it gives the trader’s downside protection and they are also obligated to sell shares at a higher price which earns more profit.

6) Long Straddle

Long straddle options strategy is when an investor purchases a call and put option on the same underlying asset with the same expiration simultaneously. This strategy is used when the investor believes that the price of the underlying asset will move significantly out of range, but he or she is unsure of the direction.

7) Long Strangle

In this strategy, the investor purchases an out-of-money call option and out-of-money put option simultaneously which have the same underlying asset and expiration date. This is used when a large movement is expected in the underlying assets and there is no surety about the direction of movement

All these strategies come with their own pros and cons, an investor has to choose what’s working best with the current market.