Option trading strategies are about the way we construct an option position, or combination of positions, in order to minimize risk and maximise profit while at the same time, taking advantage of our current view of the underlying financial instrument. Whether we anticipate the future price action of the underlying stock, commodity future, index or currency pair to be directional or range trading will influence the way we use options to take advantage of this and profit.
On the other hand, we may have reasons to believe that a large move in the underlying is imminent but aren't sure which way it will go. This may be due to price patterns we observe on charts or impending news releases. There are some option strategies which are ideal for this scenario too. Some are well known while others, hardly anyone knows about.
Options have several advantages over other leveraged instruments such as CFDs or futures. While futures may provide unlimited profits if the underlying goes in the anticipated direction, your losses can also be unlimited if it doesn't. With options on the other hand, your losses are always limited to the amount of your investment, unless you have 'shorted' or sold options without any covering long position. Most brokers won't allow you to do this anyway, unless you have a large amount of capital to cover the potential consequences.
The other advantage with options is that you can construct a combination of long and short positions with different strike prices and either the same or different expiration dates. These extra dimensions of 'strike prices', (vertical) option expiration dates, (horizontal) together with the ability to sell or 'write' option contracts as well as buy them, is the very thing that creates the opportunity for a number of option trading strategies.
So let's take a look at what's on offer. Some of these you may be familiar with because they are well known and taught by popular courses; others are well kept secrets used by professional traders.
1. Range Trading Strategies
Long Iron Butterfly
The long iron butterfly is another range trading strategy and a variation of the Iron Condor. Both these strategies use two credit spreads one using calls, the other puts.
Calendar Spreads are a popular low risk, high profit potential, options strategy for traders who believe that an underlying security, is going to be trading within a range in the near term.
Butterfly Spreads are one of the most well known and popular option strategies out there today. Combining a debit and credit spread, they have huge profit potential, sometimes around 300 percent.
Long Condor Spread
The Long Condor Spread is a setup that is attractive because, although you pay a bit more in brokerage, the risk to reward potential can be quite outstanding.
Iron Condor Spread
The Iron Condor Spread is really just two credit spreads combined, but facing opposite directions separated by a range in between. But it this gives it distinct advantages over credit spreads alone.
The short straddle strategy is normally considered to be a risky option trade due to potentially unlimited risk. However, if you use it with trading the underlying profits are almost certain.
The Calendar Straddle
The Calendar Straddle strategy is the selling of a short dated straddle and the purchase of a longer dated one. It takes advantage of the different rates of time decay between the two. Unlike the short straddle, one covers the other.
2. Non-Directional Strategies
The Options Straddle
The great thing about an options straddle is that you don't have to pick market direction. But success comes with knowing the right signals to look for.
A great Straddle Option Strategy
I'd like to share with you a straddle option strategy which I think works very well and at the same time, lowers your overall risk in each trade.
More Straddle Options Strategies
One of the best straddle options strategies is to combine elliott waves with fibonacci retracements to determine your entry points.
The Option Strangle
The Option Strangle relies on three assumptions: (1) No opinion as to the short term future direction of the underlying (2) That price action will become volatile (3) that the options are cheap.
Short Iron Butterfly
The short iron butterfly strategy is pretty much the exact reverse of the Long Iron Butterfly. It is best suited to the kind of price action you believe a price breakout is imminent.
Delta Neutral Trading Secrets
Once you understand how delta neutral trading really works, you can use it to adjust unprofitable positions to make them profitable again.
This little known strategy risks only a few dollars to potentially make hundreds or even thousands. Amazing!
3. Volatility Strategies
Option Volatility - Implied Volatility (IV)
The concept of option volatility is one of the most little understood and under utilised in option trading. But knowing how to use it can make all the difference to your results.
Options arbitrage strategies take advantage of disparities that occur between put and call option prices. When this happens, risk free trading opportunities present themselves.
4. Directional Strategies
Before you trade option debit spreads, your policy should be to pay not more than 50 percent of the difference between strike prices. You get a distinct advantage over simple long option positions.
With credit spreads you can use option 'time decay' to your advantage and give yourself an 80 percent trading edge! Here's how ...
Bull Call Spreads
Bull call spreads allow you to enter a position much cheaper than simply buying the call options. They're also more flexible to adjust when you're wrong
The Ratio Calendar Spread
The beauty of the ratio calendar spread is that you make some profit if the underlying goes nowhere, more profit if it moves as you anticipate and maybe even some if it goes slightly against you.
Backspread Option Strategy
The backspread option strategy covers a number of setups, all designed to profit from volatile market conditions. Backspreads are the opposite of frontspreads, which are for neutral market conditions.
Ratio backspreads are considered to be one of the safest longer term option trading strategies available today - so much so, that they have sometimes been called "vacation spreads".
Ratio Spread Example
In this ratio spread example we discuss a variation of the concept to demonstrate how these trade setups can not only be safe, but given the right conditions, provide a huge return on investment.
Bearish Options Strategies
Bearish options strategies are for those traders who believe the price action of the underlying asset will move downwards. A number of strategies are available, which we explore here.
Bullish Options Strategies
Bullish options strategies are for those traders who believe the price action of the underlying asset will move upwards. Long calls, bull call spreads, bull put spreads and other strategies are used.
Ratio trading is a relatively new options trading technique, used only by about the top one percent of all traders in the world. It needs to be distinguished from ratio spread trading.
5. Other Option Strategies
Binary Options Strategy
Since binary options always have an absolute outcome (you either win or lose) then one of the most important factors in any good binary options strategy should be your money management program.
Dow Jones 30 Stocks - A Good Option Trading Strategy
Dow Jones 30 stocks option is about trading each of the individual stocks that make up the famous Dow Jones Industrial Average, not about trading the DJI index itself. Let them become your friends - entry and exit is easy and spreads are tight.
Don't Just Buy Shares - Use Options to Get Them Cheap
Did you know that if you're thinking of owning shares, you could be using options to buy stocks so much cheaper than if you just went to your broker and simply bought them at market price?
Risk Free Option Trading - Using Arbitrage
Is it possible to engage in risk free option trading and get away with it. The answer is 'yes'! Here's how ...
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