12 Common Option Trading Strategies Every Trader Should Know

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12 Common Option Trading Strategies Every Trader Should Know

Let's start by discussing the Lotto game model, in which we bet on a lottery ticket and the chances of winning the lottery are very low. But if we win, we win the jackpot. We also know that there are some risks involved in trading options, but we are still committed to waiting for the gold pool as in the lotto game. However, when looking at advanced options traders, they usually view options as a hedging or a strategic tool to maximize profits and minimize losses. That's where you want to be!

In fact, there are options trading strategies that aim to reduce the risk weight and open up an unlimited profit portal. Gain all necessary skills and strategies for financial success, consider going for Fundamental Analysis training.

In this article, we are going to look at the best 12 options trading strategies that each trader must know before they start trading.

What Are Options Trading Strategies?  

Options trading strategies include buying or selling calls or put options, or a combination of these, to limit losses and generate unlimited profits. Basically, use more than one combination to get the best possible result according to the parameters defined. This is classified into bearish, bullish, or neutral.

A call option gives you the right to buy the underlying stock at a specified price within a specified period. Put options give you the right to sell the underlying stock at a predetermined price. You can get practical experience in trading through our Fundamental Analysis of stocks Training.

To level up the game, options traders should be aware of 12 different option trading strategies. In this blog post, we will explain these to you.

1. Bull Call Spread 

It is the type of bullish trading strategy which involves buying a One-at-time call option and selling an out-of-the-money call option. Both have the same underlying stocks and expiration date.

This strategy brings a profit when the underlying stock price rises, i.e., the difference minus the net debit, and a loss when the stock price falls, i.e., the net debit. Bull call spread helps to hedge when prices are falling, and profit margins are also limited.

2. Bull Put Spread  

It is the type of bullish trading strategy that options traders can use when they are a little optimistic about the underlying asset movement. This strategy is like the bull call spread where we buy ‘put’ instead of ‘call’. This strategy covers the buying of 1 OTM put option and selling of 1 ITM put option. Both have the same underlying stocks and expiration date.

3. Call Ratio Back Spread  

This is the simple options trading strategy and is implemented when the value of a stock or index is very high. With this strategy, traders can take unlimited profits when the market rises and limited profits when the market falls. Losses only come when the market stays within a certain range. In other words, investors can make a profit when the market moves in any direction. It is a three-leg strategy consisting of the buying of two OTM and the selling of one ITM call option.

4. Synthetic Call  

This options trading strategy is used by traders who are optimistic about stocks over the long term but are also concerned about negative risks. This strategy offers unlimited potential returns with less risk. The strategy is to buy put options on our shares and it is very effective. If the underlying price increases, we make a profit, if the price falls, the loss is limited to the premium paid for the put option. This strategy is like a Protective put option strategy.

5. Bear Call Spread  

It is the two-leg options trading strategies implemented by options traders with a medium bearish market view. This strategy consists of the purchase of 1 OTM call option, and the selling of 1 ITM call option. Both have the same underlying stocks and expiration date.

6. Bear Put Spread 

This strategy is very similar to a bull call spread and is also quite easy to implement. Traders would use this strategy when the market picture is moderately bearish. This strategy includes the purchase of the ITM put options and the sale of the OTM put options.

7. Strip 

It is bearish to the neutral options strategy of buying 1 ATM call and 2 ATM puts. Traders can make a profit if the price of the underlying stocks rises or falls towards the end of their lives, but when prices go down huge gains are usually made.

8. Synthetic Put 

This options trading strategy is used when investors have a negative view of a stock and are concerned about the potential strength of the stock soon. The gains from this strategy come when the underlying stock price drops, so this strategy is also known as a synthetic long put.

9. Long & Short Straddles 

This neutral trading strategy is to implement, and P&L does not affect the direction of the market movement. This strategy involves buying call and put options at ATMs.

10. Long & Short Strangles 

It is like a straddle, but the only difference between the two is that buying a straddle requires you to buy a call option and sell it from an ATM at a fixed price and strangle includes buying call options and OTMs. Long strangle is about buying an OTM to sell and buy.

11. Long & Short Butterfly 

This neutral options trading strategy combines bear and bulls spread with constant risk and limited returns. The long butterfly call spread includes the buy ITM, writing two ATM, and then buying 1 OTM call option.

12. Long & Short Iron Condor 

It consists of two bets (one long and short) and two calls (one long and short) and four strike prices. The greatest profit is made when the base price of the security closes between the average prices after the expiry date.

Test your trading skills with our Fundamental Analysis of stock markets course. Compete with thousands of investors and trade your way to the top! Practice your trading strategies so that when you are ready to enter into the real trade market, you have the right knowledge. Try the Fundamental Analysis training at LearnNow today. Happy Trading!

BY: Admin

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