Account Info
Log Out

10 Options Strategies to Consider For Your Trading Portfolio

Views 781Jul 9, 2024

Options trading might seem challenging at first, but learning key options strategies can potentially enhance your investment goals and achievements. Whether you're aiming for steady growth or want to hedge against market volatility, understanding these 10 options strategies can be helpful.

Read on to learn more.

Long Calls and Long Puts

Long call options grant the right, but not the obligation, to buy an underlying asset at a predetermined price, while long put options offer the right, but also not the obligation, to sell the underlying asset at a predetermined price.

Both strategies involve directional speculation, providing potential for gains. However, it's crucial to consider factors such as time decay and volatility when implementing these strategies when trying to maximize their effectiveness and mitigate potential losses.

Long Call

With a long call, you pay a market price upfront (called a premium) for the right, but not the obligation, to buy the underlying security at a set price (or a strike price). If the underlying security rises and you've purchased an option with a strike price lower than the current market price at expiration, you can exercise this in-the-money option, assuming you have the necessary funds to purchase 100 shares of the underlying.  

If a long call option is out-of-the money at expiration, the stock price did not reach the strike price specified in the call option contract on the expiration date (the current stock price is below the strike price).

For example, an investor purchased a call option with a $110 strike price; at expiration, the stock price was $100. The call option becomes worthless and there is no financial benefit to exercising it. The investor loses the premium paid for the option.

Another way of closing a long call position is to sell it anytime prior to expiration at either the market or limit price. If an investor sells the contract for more premium than originally paid, they will realize a profit (less any commissions or fees).

Risks

Similar to any strategy, a long call comes with risks. This can include a loss of premium, market volatility, time decay, interest rate changes, underlying stock performance, liquidity and bid-ask spreads, and risk of owning the underlying shares.

long call - buy a call moomoo

Long Put

With a long put option, an investor seeks to potentially profit from the underlying asset's decline. Some investors may use this strategy for speculation and preserving capital. A long put option gives the investor, the right, but not the obligation, to sell an underlying asset at a predetermined price (the strike price) in a specific time period (the expiration date).

If a long put expires out-of-the-money at expiration (the current market price is higher than the strike price), the contract will expire worthless and the full loss is realized.

Risks

Risks can include the potential for total loss of the premium paid, time decay works against long put positions, and an inaccurate prediction of price movements and their timing.

long put - buy a put moomoo
long put - buy a put moomoo

Short Call and Short Put

Short call options involve selling contracts that are obligations to deliver the underlying asset at a specific strike price if assigned, potentially benefiting from neutral market conditions. Short put options entail selling contracts that are obligations to buy the underlying asset at a specific strike price, potentially profiting from rising underlying asset prices or neutral market conditions.

These strategies offer the potential for income generation through premium collection. However, losses can be significant on short puts and unlimited on short calls if the market moves against the seller. Therefore, careful risk management and monitoring are essential when employing short call and put strategies.

Short Call

With a short call, an investor generally has a bearish sentiment as they sell the option in hopes the underlying asset's price will be below the respective strike price upon expiration.

Short Put

An investor using a short put strategy usually has a bullish sentiment.

options trading strategies on moomoo

Iron Butterfly

A short iron butterfly can be utilized for markets expected to have decreasing volatility, as an investors can potentially benefit from the sale of the two at-the-money options. If the volatility is too low upon opening the trade, the premium received may leave little room for potential profit.

A short iron butterfly combines four options, which can limit the potential profit and rks as the investor believes the underlying asset will remain within a specific range. If this happens, they can profit from the options expiring worthless.

With a long iron butterfly, an investor simultaneously buys a put and call at the same strike price and sells a put with a lower strike price and a call with a higher strike price.

The theoretical maximum profit is the net premium received from selling at-the-money options - the cost of buying out-of-the-money options and the theoretical maximum loss of the difference between the ATM strike and either the call or put OTM strike minus the net premium received.

long and short iron butterfly

Covered Call

A covered call has the buyer, who already holds a long position in an underlying asset, sell a call option on that same asset. This strategy is typically used by investors to generate income through the premiums received from selling the call options, or to protect against minor declines in the underlying asset's price.

what is covered call

Here's some scenarios to think about.

An investor owns 100 shares of a stock that currently trades at $50 per share. They decide to sell a call option (covered as they own the underlying asset) with a strike price of $45.

The call option is considered to be in-the-money because the market price of the stock ($50) is higher than the strike price of the option ($45). If the option is exercised, the investor would have to sell their shares for $45 each, even though they are worth $50 each in the open market.

If a covered call writer is assigned, the buyer of the call option has decided to exercise their right to buy the underlying asset at the strike price.The writer will be obligated to sell the underlying shares at the strike price. As for potential profit or loss, this will depend on the original purchase price of the shares along with the premium received.

If the investor bought the shares for less than the strike price, then they can make a profit. However, if they bought them for more, they'll take a loss and premium received when selling the call option can offset some or all of this loss.

Regardless of whether the option is exercised, the writer keeps the premium received when they sold the call option. This can provide some income, even if the option is exercised and they have to sell your shares.

covered call outlook

Iron Condor

An iron condor is an advanced strategy that enables an investor to potentially profit from low volatility in the underlying asset. It includes four contracts: two calls (one long, one short) and two puts (one long, one short) at four strike prices and the same expiration date.

The goal is for all options to expire worthess, which happens if the underlying asset closes between the middle strike prices at expiration. An investor pays a fee to close the trade if successful, but the loss remains limited.

commission-free options trading on moomoo

A long condor spread is established with a net debit (investors are paying to enter the position) and involves four options with identical expiration dates, purchased and/or sold at the same time. The theoretical maximum profit comes when underlying price is outside of the highest or lowest strike prices at expiration. The theoretical maximum loss is the total premium paid for the condor.

A short iron condor spread seeks low volatility for the underlying asset. The theoretical maximum profit occurs if the stock price remains between the two short strikes at expiration while the theoretical maximum loss is the difference between the strikes of the bull put spread (or bear call spread) minus the net premium received.

long and short iron condor

Bull Call Spread

For a bull call spread, an investor will simultaneously purchase calls at a specific strike price and sell the exact number of calls at a higher strike price. These calls have identical expiration dates and the same underlying security. This strategy can be used when an investor is bullish and thinks there will be a moderate price rise in the underlying asset.

bull call spread

Bear Put Spread

A bear put spread works similarly to a bull call spread as it's another vertical spread; it allows you to potentially profit from a declining stock price while limiting your potential losses. In this strategy, an investor simultaneously buys put options at a specified strike price while selling the same number of puts at a lower strike price.

Bear put spread

Married put

A married put, also called a protective put, is purchased by paying the premium for the cost of the put(s). This is at the same time as an equivalent amount of underlying stock is bought. The put provides protection beneath the strike price and only lasts until the expiration date. If the stock price falls, the put options act like insurance, limiting your downside risk.

Diagonal Spread

For this strategy, you buy and sell options with different strike prices and expiration dates, offering flexibility from the effects of time. You can enter a long and short position in two options of the same type, either two call options or two put options. However, they'll have different strike prices and different expiration dates. An investor's sentiment can be either bullish or bearish, depending on the options used and the structure.

Broken Wing Butterfly

This is considered an advanced strategy from the way it's structured with wings. To create this strategy, it consists of three option strike prices and can be either a bullish or bearish sentiment.

You combine buying one in-the-money option, selling two at-the-money options, and buying another out of-the-money option but at a different strike price. This strategy allows you to adjust the risk and potential reward according to your preferences while still aiming to profit from minimal price movement.

Keep in mind, when compared to a traditional butterfly strategy, the broken wing version may expose investors to a bigger loss potential should the underlying stock price quickly go against you.

options paper trading on moomoo

FAQ about options trading strategies

What is the best strategy for option trading?

The best strategy for options trading varies depending on your risk tolerance, market outlook, and investment goals. It's essential to understand each strategy's strengths and weaknesses and choose one that aligns with your objectives.

How do you trade options effectively?

Trading options effectively requires education, practice, and discipline. Start by learning the basics of options trading, including terminology and strategies. Practice paper trading or use a virtual account before risking real money. Develop a trading plan, set realistic goals, and stick to your strategy, adjusting as needed based on market conditions and changing goals.

Which indicator is best for option trading?

There isn't a one-size-fits-all answer to this question, as different indicators serve different purposes and trading styles. Some commonly-used indicators in options trading include moving averages, volatility measures (e.g. VIX), and option-specific indicators such as open interest and implied volatility. Learn about and experiment with various indicators to discover ones that might work best for your trading approach.

Bottom Line

By learning these 10 options strategies, you can gain greater confidence in navigating the complex world of options trading. Remember, practice with paper trading, so start small, stay informed, and continuously refine your skills to help increase your chances of becoming a successful options trader.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. It is important that investors read  Characteristics and Risks of Standardized Options before engaging in any options trading strategies.

Read more

Recommended