What are the options trading strategies

what are the options trading strategies

Option buyers are charged an amount called a "premium" by the sellers for such a right.

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In contrast, option sellers option writers assume greater risk than the option buyers, which is why they demand this premium. Options are divided into "call" and "put" options.

There are some advantages to trading options.

Bullish strategies[ edit ] Bullish options strategies are employed when the options trader expects the underlying stock price to move upwards. The trader may also forecast how high the stock price may go and the time frame in which the rally may occur in order to select the optimum trading strategy for buying a bullish option. The most bullish of options trading strategies, used by most options traders, is simply buying a call option.

The following are basic option strategies for beginners. Potential profit is unlimited, as the option payoff will increase along with the underlying asset price until expiration, and there is theoretically no limit to how high it can go.

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With a put option, if the underlying rises past the option's strike price, the option will simply expire worthlessly. In exchange for this risk, a covered call strategy provides limited downside protection in the form of premium received when selling the call option.

Scalping: An effective and highly profitable trading strategy

A protective put is a long put, like the strategy we discussed above; however, the goal, as the name implies, is downside protection versus attempting to profit from a downside move. If a trader owns shares that he or she is bullish on in the long run but wants to protect against a decline in the short run, they may purchase a protective put.

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Hence, the position can effectively be thought of as an insurance strategy. The trader can set the strike price below the current price to reduce premium payment at the expense of decreasing downside protection. This can be thought of as deductible insurance.

Strangles Covered call options strategy A covered call is an options trading strategy that involves writing selling a call option against the same asset that you currently have a long position on. The goal behind the strategy is to increase the amount of profit that you can make from the long position alone by receiving the premium from selling an options contract. Covered calls are used by traders who are bullish on the underlying market, believing that it will increase in value over the long term, but that in the short term there will be little price movement. The benefit of using a covered call strategy is that it can be used as a short-term hedge against loss to your existing position.

The following put options are available: June options.

See also