To be a profitable options trader, you must be familiar with the principles and strategies associated with options trading. Many beginners make the mistake of, with little to no knowledge of options strategies, jumping into the market. The fact is, especially with trading, knowledge is key to success.
With that in mind, we’ve compiled ten options strategies every beginner needs to know.
One simple strategy when it comes to calls is to buy a naked call option. In order to execute this strategy, you must buy the underlying stock and, simultaneously, write a call on that same stock.
Bull Call Spread
This strategy involves the investor purchasing calls at a certain strike price while selling the equivalent amount of calls at a higher strike price. This strategy decreases the investor’s upside on the trade and net premium spent.
Bear Put Spread
To execute this strategy, the trader purchases put options at a certain strike price, simultaneously selling the equivalent amount of puts at a decreased strike price. This is used when a decline in the asset’s price is expected.
Long Call Butterfly Spread
In this strategy, the investor combines the bull spread and the bear spread strategy, using three different strike prices and with all options having the same expiry date.
This strategy involves holding a bull put spread, and a bear put spread simultaneously. This strategy takes advantage of low stock volatility. This strategy is known for its reputation to get investors a high probability for high premiums.
In this strategy, the investor buys an out-of-the-money put and sells an out-of-the-money call at the same time. This strategy limits the amount of both profits and losses you can make while holding a stock.
To execute this strategy, the investor buys both a put and call option on the same asset with an identical strike price and expiration date. This strategy allows an investor to have a theoretically infinite profit ceiling while only having the cost of the options contracts as the maximum loss. It is a strategy that is useful to use when the investor knows that the price of an asset will move past a certain range but is unsure in which direction.
In this strategy, the investor purchases an asset and simultaneously buys put options for an equivalent amount of shares. These put options function like an insurance policy, decreasing the investor’s risk of loss when holding a stock.
This strategy involves the investor buying an out-of-the-money put and an out-of-the-money call option at the same time on the same asset. The long strangle is essentially a cheaper version of the long straddle because of its purchase of out-of-money options.
In this strategy, the investor sells an at-the-money put. The investor also buys an out-of-the-money put while selling an at-the-money call and purchasing an out-of-the-money call. This strategy is used by investors for a higher probability of at least a small gain when holding or dealing non-volatile stocks.