Understanding Options Trading Strategies

Whether your goal is to enhance income or manage risk, understanding how options trading strategies are executed based on investment goals, market sentiment and other methodologies can certainly help you meet those objectives. Options can help you identify the risk you take in a position. This risk depends on time value, volatility and strike selection. Furthermore, it can be used to hedge a current position, predict the direction of volatility, or start off a directional play.

. Bull Call Spread: In this spread, you purchase a call on the fundamental asset while selling a call simultaneously on the similar fundamental asset with the similar expiration date at a greater strike price. You must use this strategy when you think the market is more likely to rise than fall

. Bear Put Spread: In this spread, you purchase a put on a fundamental asset while selling a put on the similar fundamental asset with the similar expiration date at a lower strike price. You must use this strategy when you feel the market is more likely to fall than rise since you are capitalizing on a decline in the price of the fundamental asset.

. Covered Call: In this strategy, you can buy the assets outright and also sell a call option simultaneously on those similar assets. You can use this position when you have a neutral opinion and a short term position on the assets, and are also seeking additional profits. However, your volume of assets owned must be tantamount to the number of fundamental assets underlying your call option.

. Time/Calendar Spread: In this, you set your position by entering a short and long term position at the same time on the similar fundamental asset, but with varied delivery months. The point of this type of strategy is time decay- the more further you go in time, the more volatility you buy in this spread.

Options trading strategies can certainly be excellent tools for both risk management and position trading if you use them in a proper way!

Straddle option benefits and pitfalls

The two types of straddle options are long straddle and short straddle. Both straddle option involves holding an equal number of calls and puts with the same expiration dates and strike price. Each one of these strategies has its own strengths and drawbacks.

Straddle option benefits and pitfalls

What are the strengths of each strategy?

The long straddle allows the trader to purchase a call and a put at the same expiration date and strike price. This strategy is designed to exploit the changes in the market price by taking advantage of enhanced volatility. Regardless of the direction that the price moves, you can still earn profits.

On the other hand, short straddle involves a trader selling both a call and a put at a matching strike price as well as expiration time. This enables a trader to pull together the premium as an earning. This strategy works better in a market with minimum or no volatility. This means that you can only make profits when the market lacks ability to move in any direction. In case the market moves in any direction, your total collected premium is at risk.

Drawbacks to these strategies

The key setbacks to long straddle strategy are risk of loss and lack of volatility. In case the market lacks volatility, a trader cannot thrive using long straddle option. Both the call and put options will continually lose their value as time elapses. Unless a market chooses a direction, this will continue until the options expire valueless. On the other hand, losses can easily occur if a trader does not exit quickly enough from the losing side. Even if a call moves in money and increases in value during the process, the put value will decrease in value as it has moved further from the market price. If option losses grow quicker than gains, or the market does not move enough to cover the losses, the trade will be a loss.

The short straddle’s strength

The short straddle’s strength can also be its setback. Whereas The Best Straddle Strategy trader makes profits as long as the market does not move in any direction, he or she is exposed to unlimited risk. However, if a market picks a direction, the trader has to pay for any losses accrued and surrender the premium already collected. The only remedy to this is for the trader to purchase back the option sold anytime in the course of the trade, when value rationalizes doing so.

As you can see, straddle trading option strategies have strengths, which you can take advantage of. However, they also have drawbacks and you need to learn how to deal with them.