Option strategies to know
Countless numbers of people jump into trading options without having the knowledge of how option strategies work. Many strategies limit the risks of loss and maximise your returns; here are some of the most powerful strategy in option trading
The covered call
This strategy involves buying the naked call option. You can also choose to structure a covered call or buy write. It is popularly known to generate a lot of income and reduce trading risks. What’s the catch you should be willing to trade your shares at a specific price. For this to work, you have t purchase a stock as usual and write a call option at the same time. Investors use this strategy when they have a short term position in the stock followed by a neutral opinion in that direction.
The married put
In this strategy, the investor will purchase an asset like stock shares and at the same time purchase the options for the equal number of shares. As the holder of that option you posses the rights to sell the stock at the strike price. Most investors use this strategy to protect their downside risks while they are holding the stock. Basically, it functions as an insurance policy and establishes a price base if the stock’s price fall drastically.
The bull call spread
Here, an investor will buy calls at specific stock prices and sell them at a higher strike simultaneously. This means that both of these call options have a similar expiry and underlying asset. It is a vertical type spread strategy used by investors when they expect a rise in the price of some assets. The investors also limit their upside during his trade but also reduce the money spent.
The bear put spread
This is another popular vertical spread in option strategies. Here, the investors purchase two options simultaneously. They do it at a specific strike price and sell them when the strike price is lower. Both of these options also have a similar expiry date. Investors use this strategy when they expect the overall asset price to decline. With the bear put spread, you get both limited loses and gains.
The protective collar strategy is done by purchasing out of the money options and writing an out of the money call simultaneously. Both of these options also have similar underlying assets and expiry time. Investors use this strategy when a long position in stocks has had some gains. This strategy will allow you to have a downside risk protection white giving you a trade off and potential obligation to sell at high profits.
The iron condor
This is one of the most interesting strategies in options trading. Here, the investors hold the bear call spread and bull spread simultaneously. You can construct this option strategy by selling an out of money put and buying an out of money out of a lower strike. After that, you sell an out of money call and sell one at a higher strike. They should all have the same underlying assets and expiration. It is designed for stock that is experiencing some low volatility.