Trading options, when done correctly, are one of the most efficient ways to build money over time. An option is a contract that allows an investor to buy or sell an underlying instrument, such as a stock or an index, at a fixed price over a certain period of time in return for a premium paid by the buyer to the seller.
In this article, we will go over some of the top option trading strategies, which we believe any investor or trader should be aware of.
Here are some of the most effective option trading strategies for traders to explore.
Whether or not you apply these tactics depends on your trading style, but understanding how they function will help you adjust to shifting market conditions.
Bullish Options Trading Strategies
Let’s have a look at the Bullish Option Trading Strategies here:
1) Bull Call Spread
- The Bull Call Spread is a Debt Spreads-related option trading strategy. If you’re positive on a stock or ETF but don’t want to risk buying shares outright, consider buying a call option as a lower-risk bullish move.
- However, even Call Options can be pricey and expose you to greater risk than you are used to. Perhaps you’re asking yourself, “Is there another way?” The answer is yes! You could buy a Bull Call Spread to lower your initial investment and risk.
- Primarily, in the Bull Call Spread option, you can still buy that long call option expressing your bullish views, but you can offset some of the cost by selling a short call option in its place, so minimizing your risk.
- A Bull Call Spread is created by buying one call option and simultaneously selling another call option with a lower cost and a higher strike price, both with the same expiration date. Furthermore, this is regarded as the greatest option-selling method.
2) Bull Put Spread
- When an options trader believes that the price of the underlying asset will rise reasonably soon, they will employ the Bull Put Spread Option Trading strategy. Typically, this choice belongs to the Credit Spreads category. Although it is not the most sophisticated Option Trading Strategy, buying and selling puts and calls is more complicated than that.
- To put it simply, this spread involves selling one put option and buying another with a lower strike. In this case, theta decay will favor you because the Short-Put Option will begin to lose value faster than your Long-Put Option position.
- Given that theta decay causes a bull put position to increase value daily, it would be preferable to execute one in this situation. This approach is regarded as an excellent method for purchasing options.
3) Spread of Bull Call Ratio
- To enter this trade, a trader must have a strong bullish belief in the stock. Having a slight bullish outlook won’t help with this trade. One peculiarity of a Bull Call Ratio Backspread is that the trader’s worst loss occurs in the direction they think the transaction will go.
- The Bull Call Ratio Backspread is a bullish tactic that can be employed in place of just buying call options. Selling one or more at-the-money or out-of-the-money calls and buying two or three calls that are longer in the money than the calls that were sold make up the Call Ratio Backspread.
- Additionally regarded as the best option selling method is this one.
4) Artificial Dialogue
- To initiate a Synthetic Call, commonly referred to as a Synthetic Long Call, an investor buys and retains shares. The investor additionally purchases an at-the-money put option on the same shares as a hedge against a drop in the stock’s price.
- For many investors, this approach is like having insurance against a big decline in the stock price while they are still holding shares .Negative Option Trading Approaches ,The bearish option trading strategies are as follows:
5) Bear Call Spread
- When one’s outlook on the market is primarily pessimistic, one may employ a double options trading method known as a Bear Call Spread.
- This approach involves a trader selling a shorter-term call option while concurrently purchasing a longer-term call option with the same underlying commodity and expiration date but a higher strike price.
- A net profit is realized when the option premium on the call sold exceeds the cost of the call purchased.
6) Bear Put Spread
- A Bear Put Spread is used by a trader or investor to predict that the price of a security or asset will fall marginally.
- A Bear Put Spread is created by purchasing and selling the same number of puts on the same asset with the same expiration date and a relatively low target price.
- The difference between these two strike prices, minus the total cost of the options, indicates the greatest profit a trader can achieve with this method.
- Strip Strategy: Investors who are optimistic on volatility but bearish on market direction can use this strategy. This method includes buying two lots of “At-the-Money Put Options” and “At-the-Money Call Options.” Both choices require the same underlying security and month of expiration. The common Long Straddle resembles a bearish Strip.
- When the underlying makes a substantial move at expiration, the Strip Strategy can yield significant gains, moving more favorably in the direction of loss.
8) Synthetic Put
- An investor who sells shares short and buys a call employs a risk-equivalent approach to purchasing a put option.
- It is a type of option strategy in which you hold both a short stock position and a long call option on the same stock, similar to a long-put option.
- In a word, it is a strategy that investors might use if they have a negative bet on a company but are concerned about its potential for short-term strength. Neutral Options Trading Strategies
Now, let’s look at the Neutral Option Trading Strategies here.
9) Long & Short Straddles
- Straddle is regarded as one of the greatest option trading strategies for the Indian market. A Long Straddle is perhaps one of the simplest market-neutral trading techniques to implement.
- Profit and loss are unaffected by the direction of the market’s movement following its application. The market’s movement might go either way, but one thing is constant: the direction.
- And regardless of the trend, as long as it moves, a profit or loss is generated. A Long Straddle Options Strategy involves purchasing a long call and a long put.
- The Short Straddle Options Strategy involves purchasing both a Short Call and a Short Put with the same underlying asset, expiration date, and strike price.
- Because it is used when the market is least volatile, this approach appears to be the polar opposite of the Long Straddle approach.
10) Long Strangles and Short Straddles
- The Long Strangle (also known as the Buy Strangle or Option Strangle) is a neutral strategy in which slightly out-of-the-money put and call options with the same underlying asset and expiry date are purchased at the same time.
- This Long Strangle Strategy may be used when the trader thinks that the underlying stock will see significant volatility in the near future. It’s a low-risk, high-payoff strategy.
- When the underlying moves significantly higher or lower at expiration, the maximum loss is the net premium paid, whereas the maximum profit occurs when the underlying moves significantly upwards or downwards.
- The Short Strangle is a variation on the Short Straddle. Its goal is to maximize the profitability of the trade for the option seller. The breakeven points are broadened to accomplish this.
- This implies considerable changes in the underlying stock/index. In exchange, the Call and Put option may be worthwhile to pursue.
- This strategy requires selling two options simultaneously. Intraday Options Trading Strategies
Here are the Intraday Options Trading Strategies:
11) Momentum Strategy
- As the name implies, the goal of this Intraday Option Trading Strategy is to capitalize on the market’s momentum. This entails tracking the correct stocks before a substantial shift in the market trend occurs.
- Based on this change, traders buy or sell securities. Stock selection is influenced by recent news, takeover announcements, quarterly profits, and other factors.
- Thus, intraday traders must review such news concerning businesses on their watchlists and make appropriate buying or selling orders.
- Because share prices fluctuate due to a variety of external factors, intraday traders must make quick judgments to gain profits. The period for which individuals hold shares is determined by the market’s momentum. In addition, this is the ideal intraday strategy.
12) Breakout Strategy
- When it comes to buying and selling shares on the same day, timing is probably one of the most important considerations. This intraday trading approach entails identifying stocks that have broken out of the range in which they typically trade.
- Alternatively, a trader can recognize equities that are set to enter a new price range. In other words, traders must identify threshold points where share prices grow or decline.
- If stock prices move beyond the threshold mark, intraday traders may consider taking long positions and purchasing shares.
- However, stock prices have fallen below the threshold mark, indicating that investors may consider short positions or sell shares.
13) Reversal Strategy
- This trading method carries a high level of risk. It entails making investing decisions against the market trend based on study and estimates.
- This intraday trading approach is more difficult to execute than others. This is because intraday traders must have a thorough understanding of the market. It might also be difficult to precisely identify pullbacks and strengths.
14) Scalping Strategy
- The scalping trading approach involves profiting from minor price changes.
- This strategy is often used by intraday traders to purchase and sell commodities. Furthermore, this strategy is commonly used by high-frequency traders.
- Individuals must keep in mind that the fundamental or technological arrangement in its totality is of little value in this situation. However, while using a scalping method, price action becomes more important.
- Individuals using this intraday trading approach must find stocks that are both liquid and volatile. Furthermore, they must include a stop loss for all orders.
15) Moving Average Crossover Strategy
- Another popular intraday trading approach in India is the moving average crossover strategy. When the price of stocks or other financial instruments moves above or below the moving average, it indicates a shift in momentum.
- An uptrend is defined as a rise in share prices above the moving average. In contrast, a downtrend occurs when stock prices fall below the moving average.
- In the event of an uptrend, experts advocate taking long positions or purchasing equities. However, when there is a downtrend, traders enter short positions or sell their stock.
16) Gap and Go Strategy
- The gap and go technique entails identifying companies that have no pre-market trading. These equities’ beginning prices differ from their closing prices the day before. A gap up occurs when the opening price of a stock exceeds the previous day’s closing price.
- However, if the opposite occurs, this is known as a gap down. Intraday traders that use this technique select such stocks and buy them, believing that the gap will close before the closing bell.
