Five Useful Strategies to Consider When Trading Options

There are so many ways to invest your personal money when you’re looking around at your choices.  One of the more interesting options are… well, options! Options are marvelously flexible, powerful instruments that can be combined in numerous complex ways. The simplest, most straightforward option strategy is buying a call (or put) intending that the underlying shall rise (or fall) before expiration. Usually, however, a strategy will involve combining a short or long option with one or more different options and/or an underlying position. The different strategies are usually classified as bullish, bearish or neutral — referring to the direction of the underlying’s movement. Other strategies rely on options’ time decay or implied volatility properties. The universe of option strategies is vast; it is often hard to know which strategies are worth pursuing.

Covered Call Write

This arrangement (also called a buy-write) is created by purchasing the underlying and writing a call at a higher strike price. This neutral to slightly-bullish strategy has limited profit — if the underlying jumps in price, it may be called away from the trader. Owning the underlying introduces substantial downside risk, which is slightly offset by the premium collected from the short call.

Bull Call Spread

In choosing this strategy, the trader intends that the underlying will moderately appreciate before expiration. The combination is created by purchasing a call near the current price and writing a call at a higher strike, taking a net debit. The short call helps finance the trader’s bullish bet but limits the upside profit. Maximum possible profit is the difference between the call strikes, minus the initial debit, minus commissions. Maximum loss is limited to the initial debit.

Reverse Call Ratio Spread

This bullish strategy (also known as a call backspread) is entered into by writing one call at the current price and buying two calls at a higher strike. Maximum profit is theoretically unlimited and occurs when the underlying jumps dramatically. Maximum loss equals the difference between the call strikes, plus or minus the initial credit or debit, minus commissions.

Long Straddle

This is a simple, popular binary options strategy with limited risk. This direction-neutral trade is created by purchasing a call and a put at the same strike. The trader’s intent is for the underlying to move dramatically either up or down and/or for implied volatility to increase. Maximum profit is theoretically unlimited (though issues can fall only to zero). Maximum loss equals the initial premium paid plus commissions. There are two possible end points at which the long straddle breaks even.

Condor

The condor is a direction-neutral, limited-risk strategy with limited profit potential. The trader believes the underlying will essentially remain flat. The trade is entered by selling one near-money call, buying one call below that, selling one out-of-the-money call, and buying one call above that. Maximum profit occurs when, at expiration, the underlying is between the two middle strikes; this profit equals the difference between the lower two strikes, minus the initial debit, minus commissions. Maximum loss equals the initial debit. There are two points at which breakeven can occur.

Options trading can be a difficult thing to take on, but there are a myriad of resources that can help you to understand the possibilities for trading them or other investment avenues.  Professionals like binary options brokers can guide you in your investment decisions, or you could look for answers on your own with the broad range of finance websites on the Internet. Options might not be the best first step for those that are new to investment, but when you’ve gained some experience they can be a valuable avenue to have available to you. Either way, do your homework and make sure the resources you rely on are actually fairly respected and trustworthy sources.

Tags: Bull spread, covered call, Options strategies, Ratio spread, Strike price

Category: Investing