Posted On January 18, 2021, 7:13 am by John James
Options are derivatives that allow traders the right but not the obligations to sell or buy an elementary asset at a certain price before or on the given expiry date. Traders can earn outstanding profit from options trading if they use it properly by understanding the different option trading strategies. Traders very often start options trading with less knowledge of options trading strategies which can lead them to face colossal loss. Several option trading strategies can increase profit and lessen risks.
Here are the top 3 option trading strategies that can increase profits if they are executed appropriately.
Top 3 Options Trading Strategies
There are several options trading strategies, but the following are the best and most used top 3 options trading strategies.
- Covered Call Options Trading Strategy
- Straddle Options Trading Strategy
- Risk Reversal Options Trading Strategy
Covered Call Options Trading Strategy
In the covered call options trading strategy, the traders write or sell the call option against the asset which they are currently holding for the long positions. Traders’ existing holdings cover the option trade, which means the traders can transfer the elementary assets if the buyer of the call option utilizes the right to buy the asset.
This strategy’s focus is to increase the profit that traders can gain from the long position lonely by collecting the premium on selling an options contract. The covered call strategy is used for several different purposes. Some traders use it to gain extra profit from the asset they hold, even in a relatively flat market.
The advantage of the covered call options trading strategy is that it can be implemented as a short term hedge to existing holding against the loss. There is a risk involved in this that if the market price archives the strike price, traders might have to pay the elementary asset’s agreed amount.
The covered call options trading strategy typically executed 30-50 days prior to expiry. Because of this, traders might get the benefit of time decay, although the execution time totally depends on the trader’s goal.
Straddle Options Trading Strategy
In the straddle options trading strategy, the traders buy and sell the same numbers of calls and put them at the same strike price and expiry date. The strategy aims to gain profit on one position to hugely cover the other position’s loss so that the entire trade becomes profitable.
The type of straddle use is based on the market view of the trader. There are two different types of straddles, such as short and long.
Short straddles need to sell the put and call at the same strike price and expiry date; traders will be able to receive the premium for both. Market with low volatility benefits this strategy. This strategy depends on the move of the market price neither upwards or downwards, as any price move can put the profitability of risk trade. And as traders are selling, there is the possibly limitless downside.
In a long straddle, traders buy the put and call at the same strike price and expiry date. This method will take the benefit of the volatility of the market as the trader will make a profit in one position no matter market moves in any direction.
There are also some cons of the long straddle. If there is no volatility in the market, then both positions might attract the loss, or on the other hand, if the losing side is greater than the profit side, it will also be the net loss.
Risk Reversal Options Trading Strategy
The risk reversal option trading strategy involves selling a put option out of the money. And buying the call option out of the money with the same expiry date. This trade is referred to as bullish trade that can be implemented for credit or debit relies on where the strikes are concerning the asset.
The traders who implement the risk reversal always look to get benefit from the long call options. By selling the put pay for the call. This type of trade setup eliminates the risk of trading. But it involves the risk if the assets trade downside.
Some Tips for Trading Options.
Understand the working of the options.
Options are split into two classes, such as puts and calls. The put option grants the right to sell the elementary asset at the strike price on the given date. While the call option grants the right to buy the elementary asset at the strike price on or before the given date.
Traders should build the perfect plan of options trading.
The trading plan is crucial as the method will help traders in trading like how, when and what to trade. The plan must be perfect according to traders goals and risk management.
The options trading plan will give the traders the exact figure of capital that they provide to each strategy. And how much risk they can involve in each trade.
Selecting the Correct Online Broker
Brokers are a crucial part of online trading. All the trading strategies will give profit if they are executed correctly, and in the execution of the strategy, the brokers can help the traders accurately. The commission and the spread plays a vital role in options trading. Therefore selecting the broker with low trading fees is essential, and moreover, it should be safe and reliable.
HFTrading and ETFinance are the top online brokers. They offer low commission fees and spreads. Also are the safest and reliable as they are authorised and regulated by the leading financial authorities across the world and trusted by thousands of active traders. Traders can read the complete review of these brokers by clicking on their names.
There are many options trading strategies, but we have listed above the best 3 options trading strategies that most successful traders execute. Traders can earn reasonable amounts of profits in options trading by learning and executing these strategies correctly.