If you are an options trader or you are moving forward to options trading, you should know about the best options trading strategy. There are many options trading strategies available on the internet but you need to choose one or two before making a lot of practice. The top 5 options trading strategy includes the best options trading strategies that can bring you a huge profit with a minimum risk.
13 May, 2020, | AtoZ Markets – Options trading strategy is a complex subject in options trading. However, it is an essential element that all options traders should know. There are many options trading strategies available when trading options with variations in characteristics. Every strategy is unique, which combines multiple positions on the same security into the overall area.
Options trading strategies are potent tools if you can implement them correctly. In the end, the ability to create these spreads makes options trading a versatile and profitable form of investment.
Top 5 Options Trading Strategies
Some options trading strategies are very straightforward and easy to use. However, most of them are complicated and consist of different components. To be successful in the options trading, you don’t have to understand all strategies. You have to choose the strategy that suits your personality and do practice with it.
Let’s see the list of top 5 options trading strategies:
- The Long Call
- The Long Put
- The Cash Secured Put
- The Covered Call
- The married put
Let’s have a look at them one by one.
The Long Call
It is an options trading strategy in which you usually buy a call option or “pass long.” This secure method is a guess that the particular stock will move higher above the strike rate by expiration. You can use calls as an alternative to buying the stock. Therefore, you can make a profit if the stock price increases, minimizing the downside risk. In case you’re not worried about losing the whole premium, a long call works in a way to guess on a stock that may arise and to earn plenty of extra earnings rather than owning the stock.
It can be a path to restrict the owning risk of the stock immediately. Some investors may use a long call instead of owning a similar number of shares of stock. In this way, they can restrict their drawback to only the call’s cost rather than the higher cost of owning the stock with the fear that the stock might fall within the interim.
In the Image above, a long call allows you to long the stock at strike price A. As a result, if the price moves up, you are making a profit from an upward movement. Alternatively, a downside movement would bring loss.
The Long Put
This options trading strategy is almost the same as the long call, despite that you are expecting the stock price to decline rather than rise. In the long put, investors buy a put option by betting that the stock may move down below the strike price.
The problem with the long put is that you are taking the risk if the stock price increases. However, if you put it as an alternative to stock that you are willing to sell; therefore, your risk is minimized to the cost. So, if the stock price increases, you do not have to provide stocks as you would short. As a result, you are keeping your stocks to expire worthlessly.
Risk management is a vital part of this trading strategy. If you buy many options contracts at a time, you are increasing your risk. In the end, options might expire worthlessly, or you can lose all of your investment.
In the Image above, A long put allows you to sell a stock at a strike price A. As a result, if the price moves down, you are making a profit from a downward movement. Alternatively, an upside movement would bring loss.
The Cash Secured Put
The cash-secured put requires you to buy a stock at a specific price of the asset.
In this options trading strategy, you’re selling the put with the hope of buying the stock after assigning the put. While using this strategy, you may consider selling the put out-of-the-money. In that case, you’re hoping that the price would move down below the strike price and will stall. In this way, it will assign the put, and you will finish holding the stock. Overall, you are expecting the stock price to move up in the long-term.
You will receive a premium for the put you sell at lower the cost on the stock that you are willing to buy. If the stock does not move down within the expiration, you will gain only the premium for only selling the put. This is pretty nice of the strategy that you can make a profit by being wrong.
The Covered Call
This option trading strategy has two parts. At first, the investor should own a stock; therefore, sell a call on it exchanging for a premium payment, which gives the investor all the appreciation of the strike price. If you buy the particular stock and sell the call all at the same time, it will lower the cost basis purchasing price of the stock.
This strategy indicated that the stock would remain flat or move slightly down before the contract expiration. As a result, it will allow the call seller to take the premium and stay the stock. However, if the stock price moves down the strike price, the call seller can keep the stock and write a new covered call. Later on, if the stock moves above the strike, the trader should transfer the shares to the call buyer by selling at the strike price.
The covered call is favorite by many investors as it can generate income with limited risk. Moreover, Investors can use a covered call to perceive a better selling price for a stock or higher strike price, at which they will be profitable to sell the stock.
In the Image above, Selling the call allows you to sell stock that you have owned already at strike price A.
The Married Put
The married put is more sophisticated than the covered call. It combines a long put and owning the stock by marrying them. For every 100 shares of a stock, the investor buys one put. As a result, the investor can own a stock with a hope of appreciation and hedging the position. It is similar to purchasing insurance, while the owner is paying a premium against a decline of the asset.
The upside potentiality depends on whether the stock will move up or not. If the married put allows the investor to own the rising stock, the benefit would be infinite, minus the premium. The investor hedges his losses and continues holding the stock for further appreciation after expiration.
It is a hedging method. Investors can use this trading method if they want to continue the stock appreciation or try to protect the gains that they have made while waiting for more.
There is an endless number of options trading strategies, which start from calls and puts to the premium paid. However, implementing the best options trading strategies will result in a massive profit for an investor.
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