4 Popular Options Trading Strategies

The options market is an excellent way to make some profitable transactions with a little bit of money when it comes to trading. Since they were introduced in 1973 by the Chicago Board of Exchange, options have been growing in popularity, and traders are constantly looking for new ways to make more from their investments with these assets.

 

This article describes four popular options trading strategies that you can use to make your next move with your favourite underlying security.

 

Covered call

The first method is called ‘Covered Call’ and consists of buying an asset and selling a call option on it simultaneously.

 

Collect premium

You collect this premium by selling a call option on top of your long position. This means that this is an excellent strategy for an investor if they are long on the stock and expect it to increase in value but doesn’t expect too much volatility.

 

Limited profit

Since you collected a premium, your profits are limited; you can make money only until the time that the call option is out of the money. This means that, for example, with a stock valued at 20$ selling a 30$ call option would be considered ‘out of the money after its price has gone up past 30$. In case that happens, there’s no point selling another one, so you might as well just wait for it to expire and hope it goes above 30$ again.

 

Unlimited risk

A downside of this method is that since you collected a premium, your risks are unlimited. This means that, for example, if the stock falls from 20$ to 0$, you lose all of your investment and more because now the option is deep in the money.

 

Collar

The second method is called ‘Collar’ and consists of buying an asset, selling a put option on it simultaneously, and going long on a future.

 

Create income

By going long on a future, you’re taking on a fixed risk which makes this strategy suitable for investors who want to generate some income from their assets without paying interest rates on them or worrying about volatility.

 

Limited profit

Since you sold a put option, your profits are limited; as with covered calls, you can make money only until the time that the put option is out of the money.

 

Unlimited risk

A downside of this method is that since you sold a put option, your risks are unlimited. This means that, for example, if the stock falls from 20$ to 0$, you lose all of your investment and more because now the option is deep in the money.

 

Strangle

The third method is called ‘Strangle’ and consists of buying an asset and simultaneously selling both call and put options on it at different strike prices.

 

Limited profit but unlimited loss potential

Since you collected two premiums, your profits are limited; one premium makes sure they’re limited on the upside. If it becomes deep in the money, you’ll start losing all of your investment.

 

Unlimited risk

A downside to this method is that since you collected two premiums, your risks are unlimited. This means that, for example, if the stock falls from 20$ to 0$, you lose all of your investment and more because now both options are deep in the money.

 

Bull call spread

The fourth method is called ‘Bull Call Spread’ and consists of buying an asset, selling a call option on it at a higher strike price, and going long on a future.

 

Limited profit with limited loss potential

You collect two premiums, so even though you’re making a limited amount of money, you’re also protecting yourself from a limited downside.

 

Unlimited Risk

A downside to this method is that since you collected two premiums, your risks are unlimited. This means that, for example, if the stock falls from 20$ to 0$, you lose all of your investment and more because now both options are deep in the money.

 

In Conclusion

If you are interested in trading options, contact a reputable online broker from Saxo Bank, and try a demo account before investing your own money. For more information, visit company website here.

 

 

 

 

 

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