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- This makes it pretty hard to decide which is the most profitable options strategy.
- By Lucas Downey Updated May 29, Traders often jump into trading options with little understanding of the options strategies that are available to them.
- Options allow for potential profit during both volatile times, and when the market is quiet or less volatile.
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Options traders, on the other hand, realize a profit can be made in any environment, even when the market doesn't trade up or down. Options contracts are flexible tools that make this possible, though some approaches are as risky and complex as they are versatile.
Define Success to Have Success Best Options Strategies to Know Here are some of the most effective options trading strategies you can use in the right situation as a profit booster. Strategies will be matched with trading profiles to give you context as to who might enjoy using them. Selling Covered Calls Wikimedia Selling a call means writing a contract that gives a buyer the right to purchase shares of stock from you at the contract strike price. Because you are selling, you are taking in an immediate premium from the buyer, known as the time and intrinsic value of the option.
Writing Options One way to profit from options in any market, as well as to employ even more sophisticated strategies, is by writing options. When a speculator writes an option contract, he receives profitable option strategies payment from an investor who purchases it.
This payment is known as the premium, and the speculator keeps this payment even if the contract right is never exercised. As a result, profitable call options can be written for commodities the speculator believes will trade flat or downward and put options for commodities trading flat or upward.
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Writing contracts without an appropriate position in the underlying commodity entails a substantial risk, however. The Straddle Strategy Most stock and option investments involve the purchase of a single security that becomes profitable if the underlying commodity moves in one particular direction, up or down.
Instead of hoping for a specific move, a straddle involves buying both a call and a put option at the same strike price and with the same expiration dates. This becomes profitable if the security moves in either direction, as long as it moves enough to cover the premium cost for both contracts.
A straddle may also be written by a speculator if he believes the commodity will trade flat but at a theoretically unlimited risk.
The Strangle Strategy At first glance, a strangle appears very much like its brother, the straddle.
While both feature the purchase of a put and call option with the same expiration date, the contracts are instead purchased at different strike prices. This enables a speculator to enter the position at a lower cost, as one or both of the contracts may be purchased out of the money, meaning they are not worth exercising at the underlying commodity's current value.
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While this is a less expensive position to enter, the strangle also requires more movement in the commodity before it becomes profitable than the comparable straddle strategy. Like the straddle, a strangle may also be written by the speculator, though at similarly great risk.
Collar Strategy One of the more difficult option strategies to understand is the collar. To create a collar, the speculator first must own the commodity directly. She then writes an out-of-the-money call option and receives a profitable option strategies for having done so.
With the premium, she purchases an out-of-the-money put option. Therefore, if the commodity moves down, her loss is limited due to the put option. If the commodity moves up, she still makes a small but limited profit on the upward movement.
A reversed form may be created by a speculator who begins with a short position in a commodity; she profits if it moves lower and is protected against unfavorable upward movement.