Many novice traders must thoroughly familiarize themselves with the various techniques that may be employed before they headfirst into options trading. Risk-reducing and profit-boosting options techniques abound. Traders may get the freedom and leverage of stock options with a little practice.
The Covered Call
Purchasing a "bare" or "outright" call option is one approach when dealing with calls. A simple buy-write or covered call can likewise be arranged. This is a common tactic since it pays out in income and mitigates some of the risk associated with holding a long position in the stock.
The cost is that you have to be willing to sell your stock at a predetermined price, known as the short strike price. You buy the stock regularly, then sell a call option on those shares simultaneously to implement the strategy.
Stayed Married
An investor using a married put strategy will buy an asset and simultaneously put options for the same number of shares. Each put option contract is for 100 shares and gives the holder the right to sell the stock at the strike price.
The goal of this tactic is to limit the amount of money lost by an investor in the event of a decline in the value of a stock they own. This tactic works like an insurance policy, preventing you from losing too much money if the stock's price suddenly drops. Because of this, a protective put has another name.
Bull Call Spread
Bull call spreads include the simultaneous purchase and sale of the same number of call options at two different strike prices. The time value and underlying asset of both call options will be the same.
When an investor has an optimistic outlook on the underlying asset and believes its price will climb by a reasonable amount, he or she may choose to employ a vertical spread trading technique. By employing this tactic, the investor can reduce their net premium outlay while limiting their potential gain from the deal.
Bear Put Spread
Bear put spread is a variation of the vertical spread. An investor employs this method when they buy a certain number of put options at one strike price.
Both options were acquired with the same expiration date and underlying asset. 2 It is employed by traders who are pessimistic about the value of the asset they are trading and anticipate a decrease in the asset's price.
The technique has a low potential for both gains and losses. By looking at the profit and loss statement up top, you can tell this is a bearish strategy. The stock price must decline for this method to be effective.
Safeguard Collar
When you own the underlying asset, you may use a protective collar approach by acquiring an out-of-the-money (OTM) put option and writing a similar call option (with the same expiration).
This tactic is frequently employed by traders after a stock in which they have been long after having achieved significant price appreciation. Because the long put helps lock in the possible sale price, investors are protected from a drop in value. But the cost might be having to sell shares at a greater price than they'd like to and missing out on potential gains.
Long Straddle
When investors purchase a call option and a put option on the same underlying asset at the same strike price and expiration date, they engage in a long straddle options strategy.
Traders employ this tactic when they anticipate a large price swing for the underlying asset but cannot predict how it will go.
In theory, potential profits for the investor under this method are infinite. However, the total of the options contracts' purchase price is the most that the investor stands to lose.
Long Strangle
An investor using the long strangle options strategy will buy two options on the same underlying asset and the same expiry date but with different strike prices.
The investor employing this tactic anticipates a significant price swing in the underlying asset but cannot predict its direction.
This tactic may be a bet on a company's earnings report or an event involving a drug stock's approval by the Food and Drug Administration (FDA).
Butterfly Spread Long Call
In the past, successful tactics have needed a merger of two separate contracts or jobs. To create a long butterfly spread with call options, an investor combines the advantages of both a bull spread and a bear spread.
Moreover, they will employ a variety of strike prices across three distinct scenarios. Each option has the same expiration date and underlying asset.
Purchase one in-the-money call option at a lower strike price, sell two at-the-money call options, and buy one out-of-the-money call option to create a long butterfly spread. If a butterfly's wings are spread evenly, it will seem like a balance.
