Option Trading Strategies Overview

Option Trading Strategies Overview

Option trading can be as profitable as it is risky.

Since there are two classes of options, namely puts and calls, that can be both shorted (sold with the view of establishing a position) and longed (bought for that reason) used in bearish as well as bullish markets, the number of possible strategies to be developed is almost unlimited.

Joining option trading market lets you profit from upside to downside price movements, and even from stock stagnancy!

There are four main types of strategies followed in option trading. These are bullish market strategies, bearish market strategies, neutral and special ones.

However, specialists suggest that before adopting certain option trading strategies we make sure it is well understood: every option loses all of its time value in the end, every ‘out-of-the-money’ option expires worthless, and – more than a half of market activity fall to sideway movements.

The strongest position in bullish option trading is call-buying. It is popular as losses are limited only to the premium paid. Investors adopt this strategy for undervalued options with growing volatility.

Put-selling, on the other hand, is a neutral option trading strategy suitable for use at bullish markets with high volatility. Profit here is defined by the premium obtained.

Two more bullish option trading strategies include purchasing vertical bull call spreads (that is, buying calls and selling calls of higher strike price) and selling vertical bear put spreads (selling puts and buying puts of lower strike price). The losses for the former are limited to debit and for the latter – to the spread between the strike price and the credit.

One of the strongest bearish option trading strategies is put-buying implemented for undervalued options with volatility going up. As with the respective bullish option trading strategy here you can only lose the premium.

If the option is overvalued and the market is either steady or getting bearish, it may be reasonable to use a neutral bearish position and sell a call. Profits equal to the premium.

Other option trading strategies are vertical bear put spread buying and vertical bull call spread selling.

As for the neutral markets, option trading strategies include Strangle (using time value at maximum), Arbitrage (simultaneous purchasing and selling of similar options), Calendar (selling (buying) options in the near month and purchasing (selling) in the far month - basing on the assumption that near month time value falls faster, Ratio Call (buying calls and selling calls of higher strike price) as well as Guts (popular for the large premium), Butterfly, Box and Conversion (profitable for sure if adopted at credit).

More useful information on the topic of option trading can be found in the articles Basic Principles of Option Trading, Successful Option Trading, etc.