Options trading is a versatile and complex form of trading that has recently gained popularity. Options are contracts that give traders the right but not the obligation to buy or sell an underlying asset at a specified price within a specified time frame. With a covered call strategy, traders can hedge their positions, generate income, and speculate on market movements.
However, options trading is not without risks, and beginners need to understand the strategies they can use to minimize their risks and maximize their returns. In this blog, we will discuss the top 12 options strategies every beginner trader should understand.
Bullish Options Strategies
Bullish option trading strategies are used by traders who expect the underlying asset price to increase. These strategies are used to generate profits from the upward price movement of the underlying asset. Here are some popular bullish options strategies:
1. Long Call
A long call option is a bullish strategy that involves buying a call option on an underlying asset with the expectation that the price of the asset will increase. The trader profits from the increase in the underlying asset price and can sell the option at a higher price than the purchase price. This guaranteed profit option strategy is used when the trader is bullish on the asset and believes that the price will rise.
2. Covered Call
A covered call is a conservative strategy that involves holding a long position in an underlying asset and selling a call option on the same asset. The covered call option strategy is used when the trader is neutral to bullish on the asset and wants to generate income from the option premium. The trader profits from the option premium and can sell the underlying asset at a higher price if the price increases.
3. Bull Call Spread
A bull call spread is a bullish strategy that involves buying a call option at a lower strike price and selling a call option at a higher strike price. This no-loss option strategy is used when the trader is bullish on the asset but wants to limit their potential losses. The trader profits from the difference between the strike prices if the price of the underlying asset increases.
4. Synthetic Call
A synthetic call is considered a bullish options strategy as it replicates the characteristics of a long call option. It is used when the trader has a bullish outlook on the underlying asset and wants to participate in its upside potential. The synthetic call strategy is created by holding a long position in the underlying asset and short-selling a corresponding number of put options with a lower strike price. The long position in the underlying asset provides the upside potential of a long call option, while the short put position provides downside protection.
These are some of the most popular bullish options strategies used by traders. It’s important to understand the risks involved in options trading and only invest money that you can afford to lose. Traders should also consult with a financial advisor before entering the options market.
Bearish Options Strategies
Bearish option trading strategies are used by traders who expect the underlying asset price to decrease. These strategies are used to generate profits from the downward price movement of the underlying asset. Here are some popular bearish options strategies:
5. Short Put
A short put option is a bearish strategy that involves selling a put option on an underlying asset with the expectation that the price of the asset will not decrease significantly. This strategy is used when the trader is bearish on the asset and believes that the price will not reduce significantly. The trader profits from the option premium and must buy the underlying asset if the price falls to the strike price.
6. Bear Put Spread
A bear put spread is a bearish strategy that involves buying a put option at a higher strike price and selling a put option at a lower strike price. This strategy is used when the trader is bearish on the asset but wants to limit their potential losses. The trader profits from the difference between the strike prices if the underlying asset price decreases.
7. Short Call
A short call option is a bearish strategy that involves selling a call option on an underlying asset with the expectation that the price of the asset will decrease. This strategy is used when the trader is bearish on the asset and believes that the price will fall. The trader profits from the decrease in the underlying asset price and can buy the option back at a lower price than the selling price.
8. Protective Put
A protective put is a conservative strategy that involves holding a long position in an underlying asset and buying a put option on the same asset. The trader profits from the underlying asset if the price increases and can sell the underlying asset at the strike price if the price decreases. This no-loss option strategy is used when the trader is bullish on the asset but wants to protect against potential losses.
These are some of the most popular bearish options strategies used by traders. It’s important to understand the risks involved in options trading and only invest money that you can afford to lose. Traders should also consult with a financial advisor before entering the options market.
Neutral Options Strategies
Neutral options strategies are option trading strategies used by traders who expect the underlying asset price to remain relatively unchanged or move within a limited range. These strategies are used to generate profits from the premium collected from the options positions. Here are some popular neutral options strategies:
9. Straddle
A straddle is a neutral strategy that involves buying both a call option and a put option on an underlying asset with the same strike price and expiration date. The trader profits from the price movement in either direction. This guaranteed profit option strategy is used when the trader is neutral on the asset but expects a large price movement in either direction.
10. Iron Butterfly
An iron butterfly is a neutral strategy that involves selling a call option and a put option at a certain strike price and buying a call option and a put option at a higher and lower strike price, respectively. This strategy is used when the trader is neutral on the asset and expects a limited price movement. The trader profits from the premium collected from the options positions and the difference between the strike prices.
11. Iron Condor
An iron condor is a neutral strategy that involves selling a call option and a put option at a higher strike price and buying a call option and a put option at a lower strike price. This strategy is used when the trader is neutral on the asset and expects a limited price movement. The trader profits from the premium collected from the options positions and the difference between the strike prices.
12. Strangle
A strangle is a neutral strategy that involves buying both a call option and a put option on an underlying asset with different strike prices and the same expiration date. This strategy is used when the trader is neutral on the asset but expects a large price movement in either direction. The trader profits from the price movement in either direction.
These are some of the most popular neutral options strategies used by traders. It’s important to understand the risks involved in options trading and only invest money that you can afford to lose. Traders should also consult with a financial advisor before entering the options market.
Conclusion
Options trading can be a valuable tool for traders looking to hedge their positions, generate income, and speculate on market movements. However, options trading is complex and requires a deep understanding of the strategies available to traders.
The above mentioned strategies are some of the most popular options trading strategies that beginners should understand before entering the options trading market. Remember, options trading is risky, and traders should only invest money that they can afford to lose.
AUTHOR BIO:
Adrian Collins works as an Outreach Manager at OptionDash. He is passionate about spreading knowledge on stock and options trading for budding investors. OptionDash ensures to offer the best Covered Call and Cash Secured Put Screener on the internet.