Option Trading Strategies
A lot of times, traders would jump into the trading options game without any background or with little understanding of the various options trading strategies available. They are not even aware of how many options will be available for them which help to limit their risk and maximize return at the same time.
With a little effort involved, traders should be able to learn how to take advantage of the flexibility as well as the full power of options as a type of trading vehicle. Below is a list of the various options trading strategies that each and every trader should be familiar of, whether you are a beginner or a pro.
Aside from buying a naked call option, you may also be able to engage on a basic covered call strategy, also known as the buy write strategy. Under this strategy, traders will need to purchase assets outright and then simultaneously sell a call option under the same assets. The volume of assets that you owned should be equal to the number of assets underlying the call option.
Investors usually make use of this option strategy if they have short term positions as well as neutral opinion on certain assets and that they are looking to generate more profits or protect it against a potential decline based on the value of the underlying assets.
Under the married put options strategies, the investor who will purchase or those who currently own a certain asset, like the shares, will have to simultaneously purchase a put option to an equivalent number of shares. Investors will make use of this strategy if they are quite bullish about the asset’s price and that they want to keep themselves protected against potential short term losses. Such binary options strategy functions like an insurance policy and that it sets up a floor in case the price of the assets will dramatically plunge.
In the bull call spread strategy, the investor will need to simultaneously buy call options at a given strike price and will sell the same number of calls at a much higher strike price. Both the call options must have the same expiration month as well as underlying asset. This certain type of vertical spread strategy for options trading is being used if an investor is bullish and that he is expecting a moderate increase on the price of the underlying assets.
Another binary options strategy, the bear put spread, also belongs under the vertical spread strategy. For this option strategy, the investor must simultaneously purchase put options at a certain strike price and then sell similar number of puts at a much lower strike price. Both options are for similar underlying assets and should have the same expiration period. This method is being used if the trader is bearish and that he expects for the price of the underlying assets to lower. It also offers both limited gains as well as limited losses.
The protective collar is another binary option strategy that is often done by purchasing out of the money put option while writing an out of money call option around the same time. And this is also for the same underlying assets, like the shares. These types of options strategies are used by certain investors right after a long position in a stock has gone through a substantial gain. As such, investors will be able to lock in their profit without the need to sell their shares.
The long straddle options strategy is being used if an investor will purchase both put and call option in the same strike price, expiration date, as well as underlying assets, all done in a simultaneous basis. The investor often makes use of this strategy if he believes that the price of the underlying assets will significantly move, yet, he is unsure on where it is going to move. This type of binary options trading system will allow investors to be able to maintain unlimited gains, although the loss is limited at the cost of both the options contracts.
Under the long strangle options strategy, the investor will need to purchase both put and call option under similar maturity and underlying asset, only at different strike prices. The put strike price will usually be below the strike price of the call option and both options are usually out of the money.
The investor who makes use of this type of binary options trading strategy believes that the price of the underlying asset will experience a huge movement, although he is unsure on what direction it will take. The losses are often limited to the cost of both options and strangle options strategies and is often less expensive than straddles since the options are bought out of the money.
As you can see, all the option strategies mentioned have required for a combination of two different contracts or positions. In the butterfly spread binary options system, the investor will have to combine the bull spread strategy as well as the bear spread strategy and then make use of three different strike prices.
Example, one certain type of butterfly spread will involve purchasing one call or put option at a lowest or highest strike price, while at the same time, selling two call or put options at a higher or lower strike price and one last call or put option at a much higher or lower strike price.
One of the most interesting option strategies of all is the iron condor. Under this type of option strategy, the investor will have to simultaneously hold a long as well as short position on two different strangle strategies. This strategy is one of the binary options strategies that are fairly complex and thus, it requires a lot of time to master.
For the iron butterfly strategy, the investor will need to combine both the long and short straddle with the simultaneous sale or purchase of strangle. Even though it is similar to the butterfly spread, the iron butterfly strategy is different since it makes use of both calls and puts unlike using one or the other. The profit and loss are often limited in a specific range only depending on the strike prices of the options that was used.