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 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 expiry dates. These extra dimensions of ‘strike prices’, option expiry dates, 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.
Option Trading Strategies – Contents
1. Range Trading Strategies
2. Non-Directional Strategies
The Options Straddle
A great Straddle Option Strategy
Once you know the theory, try this
The Option Strangle
Delta Neutral Trading Secrets
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)
4. Directional Spreads
5. Other Strategies
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Selling Puts to Acquire Stocks Not rated yet
Of all the options trading strategies, I think selling puts to acquire stocks is the one I like best. It’s like being paid to put in a limit order on a …