Your strategies when trading is crucial in determining your profits. Regardless of whether you trade options, stocks, or forex, strategies will matter.
You, therefore, need to understand the different strategies available in trading for you to improve your profitability.
In options trading, there are more than ten strategies you can employ in your trading plan. Each of these strategies works differently and have different results. Some option strategies will maximize your profits while others result in loss.
You should ensure that the strategy you choose suits your trading style and plan. But how can you know which strategy to choose?
Below are five options strategies that have worked for most traders.
1. Long call options
This is one of the most basic strategies used in options trading. It’s used by confident traders who believe that the stock price will significantly rise before it expires and so, they can take advantage of it.
The options are leveraged, and so, the traders are allowed to risk small amounts of their capital.
The benefit of this strategy is that losses depend on the amount risked. The profits to be gained is, however endless depending on far the stock price will rise.
This is probably the reason why it’s popular; the process of earning is simple.
2. Covered call
This strategy requires you to sell the stocks you own and generate income with some downside protection. It is used by traders who don’t predict a significant rise or fall in the market trend soon.
They, therefore, sell it to other investors to gain the downside protection for the stocks. The strategy, however, means that you get limited protection if the price of the stock falls below the market price.
3. Long put
Also known as the buying puts. This strategy is used by traders who want to use leverage to take advantage of the falling stock prices.
Unlike the trader, therefore, buys put options in the belief that the option prices will rapidly decrease before they expire. The put options, however, are very risky since; if they don’t fall below the market prices within the expiration due date, they become worthless.
It is, therefore, a very risky strategy. However, the loss incurred is also based on the premium paid; hence, you can’t lose too much.
The profits potential is also unlimited. You, therefore, have to think critically before picking this option.
4. Protective put
Also known as the put hedge. This strategy is used by traders who already own stock but are unsure of its performance in future. They, therefore, acquire a put option to act as a hedge in case of a price drop.
The strategy works in a way such that if the prices rise or stagnate, the value of the option becomes meaningless. However, the trader still gains from the value of the underlying.
If the prices drop beyond the underlying level, the trader profits from the value of the option, which also counterbalances the capital loss incurred.
5. Married Put strategy
This strategy is used by traders who want to cover for small losses in the market. The approach involves the trader after buying stocks then goes ahead and gets an equal number of options.
Most traders will do this when they are bullish of stock and are uncertain of their market performance. They are referred as married because, both the put and the stock are purchased on the same day.
It acts as an insurance for your stocks and allows you to remain in a bullish position. It’s however quite expensive for all your stock.
Conclusion
Understanding option trading strategies is crucial if you are to succeed in it. You, therefore, need to grasp how each of these strategies operates and when it’s the right time to use them.
If implemented correctly, you’ll be able to reap more returns and minimize your losses; every trader dream. Therefore, make it your aim to understand option strategies.