Best Option Trading Strategies - Different Types & Benefits

Options trading strategies combine different options contracts (calls and puts) to gain or manage risk. These strategies play an important role in guiding investors in balancing risk, controlling losses, and generating stable returns. Traders use option strategies to hedge, speculate, or generate income depending on price trends. Options trading involves combining calls (buy), puts (sell), or both to gain from different market conditions, whether the market is moving bullish or bearish. In this article, we will explore the option strategies, their advantages, disadvantages, and much more.  

Top 20 Option Trading Strategies for All Market Conditions 

The option trading strategies help traders in selecting positions based on different market directions and managing risk in a disciplined way. Below is a list of the best option trading strategy for all market conditions.  

Bullish Options Strategies 

1. Bull Call Spread 

• How it works: A bull call spread works by purchasing one lower strike call and selling one higher strike call with the same expiry date.  
• When to use: This strategy can be used when traders expect a moderate rise in the underlying price. 
• Risk vs Gain: The loss is limited as per the premium paid, and the gains are also limited. This strategy works well when the price moves slightly higher. 
• Example: Suppose a trader purchased a call option for 1500 and sold a call option for 1550 with the same expiry. Then they may gain if the price moves above 1500, but gains may stop increasing once it crosses 1550. This creates a low-cost bullish setup for small upward moves.  

2. Bull Put Spread 

• How it works: A bull put spread works by selling a put option with a higher strike price and buying a put option with a lower strike price of the same expiry date.  
• When to use: A bull put spread can be used when the market is expected to rise or stay above a certain level. 
• Risk vs Gain: The loss stays limited if the price is falling too much, and the gain is restricted to the premium received. It works well when the market stays above the sold put level. 
• Example: Suppose a trader sold a 1500 put and bought a 1450 put. They may gain if the price stays above 1500, and losses stay limited to 1450. This helps to earn from a moderately rising or stable market. 

3. Call Ratio Backspread 

• How it works: It is referred to as a three-legged options strategy in which investors and traders purchase two out-of-the-money call options and sell one in-the-money call option. 
• When to use: This strategy can be used when traders are expecting a strong upward move with high volatility. 
• Risk vs Benefit: If the price stays near the strike, then the chances of loss are small, while gains can grow quickly if the price rises strongly. 
• Example: If a trader sold a 1500 call and bought two 1550 calls, then they may gain if the price rises sharply above 1550, while losses are limited if the price stays near the strike. This may work well when expecting a big upward movement. 

4. Synthetic Call 

• How it works: A synthetic call works by holding an underlying stock and buying a put option on the same stock. 
• When to use: A trader may use this strategy when they are expecting the prices to rise over time, but still want some protection if the market falls. 
• Risk vs Benefit: Losses are limited because the put provides downside protection, while gains can grow if the stock price rises. This helps traders stay invested while managing risk. 
• Example: A trader buys the stock and sells a 1500 call option. They might gain if the stock falls slightly and lose if it rises strongly.  

Bearish Options Strategies 

1. Bear Call Spread 

• How it works: This works by placing a lower strike call and purchasing a higher strike call that has the same expiry. 
• When to use: Bear call spread can be used when expecting a mild decline or stable price below the short strike. 
• Risk vs Benefit: The losses are limited, and the gains are the net premium received. 
• Example: Suppose a trader sells a 1500 call and buys a 1550 call. Then they may gain if the price stays below 1500, and the loss stays limited above 1550. This works when traders expect a mild fall or sideways movement. 

2. Bear Put Spread 

• How it works: This works when a trader buys one in-the-money put and sells one out-of-the-money put. 
• When to use: This strategy can be used when traders are expecting a moderate price decline. 
• Risk vs Benefit: The risk here stays limited to the net premium, whereas the gains are limited to the strike difference. 
• Example: Let’s say a trader bought a 1500 put and sold a 1450 put. They may gain if the price drops below 1500, but the gains stop growing after 1450. This is useful when expecting a small downward move. 

3. Strip 

• How it works: The strip strategy works when traders buy one call and two puts at the same strike and expiry. 
• When to use: This strategy can be used when expecting high volatility with more probability of downside. 
• Risk vs Benefit: There is a higher profit potential if the price falls and a moderate loss if the price stays stable. 
• Example: Traders buy one 1500 call and two 1500 puts. They earn more if the price falls sharply and also gain if it rises strongly. 

4. Synthetic Put 

• How it works: A synthetic put works by holding the underlying stock and selling a call option at the same strike and expiry. 
• When to use: The strategy is applicable when it is anticipated that the market will experience a temporary decline, and yet the exposure to stocks is required.  
• Risk vs Benefit: The premium from the sold call offsets some risk, and gains are limited if the stock rises sharply. 
• Example: Suppose a trader buys the stock and sells a 1500 call. They are protected if the stock falls moderately, but their profit is limited if the stock rises above 1500. 

Neutral Options Strategies 

1. Long Straddle 

• How it works: The long straddle option works by simultaneously purchasing a call and a put option at the same strike price and expiry date. 
• When to use: Traders may use this strategy before major events or expected high volatility. 
• Risk vs Benefit: Loss is limited to the premium, while the gains might rise in either direction. Works when expecting a big price swing. 
• Example: A trader buys a 1500 call and a 1500 put. They gain if the price makes a strong move in either direction. This is useful before major announcements. 

2. Short Straddle 

• How it works: A short straddle strategy works by selling one call and one put at the same strike price and expiry date. 
• When to use: This strategy can be used when expecting a very low volatility. 
• Risk vs Benefit: The gains are limited to the premium received, but the losses might rise if the price moves too much.  
• Example: A trader sells a 1500 call and a 1500 put. They earn if the price stays close to 1500, but losses rise sharply if it moves too far. This works in stable, low-volatility markets. 

3. Long Strangle 

• How it works: This strategy works when traders buy an out-of-the-money call and put. 
• When to use: When expecting sharp movement but unsure of direction. 
• Risk vs Benefit: In the strangle option strategy the loss is limited to the premiums, and the gains might grow if the price moves sharply up or down.  
• Example: Suppose a trader purchased a 1550 call and a 1450 put. They might gain if the price makes a big move up or down. This costs less than a straddle but needs a wider price move. 

4. Short Strangle 

• How it works: The strangle option strategy works when a trader sells an out-of-the-money call and an out-of-the-money put at the same expiry. 
• When to use: It might be used when expecting range-bound movement. 
• Risk vs Benefit: The gains remain limited to the premium, but losses might increase on strong moves. The strangle option strategy is suitable when the market stays in a range. 
• Example: A trader sells a 1550 call and a 1450 put. They gain if the price stays between these levels. Losses increase if the price breaks out sharply on either side. 

5. Long and Short Butterfly 

• How it works: Long butterfly works when a trader buys one lower-strike call, sells two middle-strike calls, and buys one higher-strike call, all with the same expiry date. On the other hand, a short butterfly works when a trader sells one in-the-money call, buys two at-the-money calls, and sells one out-of-the-money call.  
• When to use: The long butterfly strategy can be used when traders are expecting very low movement around the ATM strike. Whereas a short butterfly can be used when expecting high volatility.  
• Risk vs Benefit: The risk and gains are limited in the long butterfly strategy, and it is more suitable in stable markets. In short butterfly, both the risk and gains are limited.  
• Example: A long butterfly takes place when traders buy a 1450 call, sell two 1500 calls, and buy a 1550 call. They earn the most if the price closes near 1500. It is ideal for low-movement markets. A short butterfly takes place when traders sell a 1450 call, buy two 1500 calls, and sell a 1550 call. They gain when the price moves strongly away from 1500. This works for expected volatility. 

6. Long and Short Iron Condor 

• How it works: The long iron condor combines both a bull put spread and bear call spread. A short iron condor is the reverse of a long iron, here the investor buys the closer-to-market strikes and sells the farther-from-market strikes. 
• When to use: A long iron condor can be used when expecting low volatility in a wide range. A short iron condor can be used when expecting higher volatility and anticipating a breakout beyond the range. 
• Risk vs Benefit: In the long iron, the risks are limited with limited gains from premiums. In short condor, the risk is limited, while traders might make gains if the prices move sharply.  
• Example: A long iron condor takes place when traders combine a bull put spread and a bear call spread around the price. They gain if the price stays within a wider range. A short iron condor takes place when traders reverse the iron condor by buying the inside strikes and selling the outer ones. Traders make gains if the price breaks out of the range. 

Intraday Options Strategy  

1. Momentum Strategy 

• How it works: The momentum strategy works by entering into options positions in the direction of strong intraday momentum. 
• When to use: This strategy can be used during trending markets on high-volume days. 
• Risk vs Benefit: The loss may occur if momentum passes away quickly, but gains can quickly occur during strong trends. 
• Example: This strategy takes place when traders buy a call or put option when the price moves strongly in one direction with high volume.   

2. Breakout Strategy 

• How it works: The breakout strategy works when the price is above a strong resistance or below a strong support. It demonstrates the emergence of a new trend. 
• When to use: This is applicable in the consolidation stages, after which sharp turns are made. 
• Risk vs Benefit: False breakouts can cause losses, while strong breakouts can offer quick gains.  
• Example: A trader enters a trade when the price breaks a key support or resistance level. If the move continues, the option gains quickly. It might be useful during big intraday moves. 

3. Reversal Strategy 

• How it works: The reversal strategy aims to identify overbought/oversold zones and trade in opposite directions. 
• When to use: This strategy can be used at key turning points or after sharp spikes. 
• Risk vs Benefit: Loss may occur if the reversal does not hold, but gains might be quick when the trend turns.  
• Example: Traders take a position opposite to the strong trend when signs of reversal occur. Gains are generated from the quick pullback. Works near major support or resistance. 

4. Scalping Strategy 

• How it works: The scalping strategy works by taking quick, small gains by entering and exiting quickly. 
• When to use: One may use this strategy during stable, predictable price movements. 
• Risk vs Benefit: The losses may stay small but regular, and the gains are also small but quick. This works in highly liquid markets. 
• Example: A trader enters and exits options within minutes to capture tiny price movements. The gains are small but frequent. 

5. Moving Average Crossover Strategy 

• How it works: In this strategy, the short-term and long-term moving average cross overs to trade.  
• When to use: This option buying strategy can be used in a clear trend-forming market. 
• Risk vs Benefit: Losses might happen in an unstable market, while gains might come when trends continue.  
• Example: Traders buy a call when the short-term average moves above the long-term average. They might gain if the trend continues.  

6. Gap-to-Go Strategy 

• How it works: The gap and go strategy works by focusing on stocks that open at a higher price than the previous day’s close. Traders aim to look for a strong buy option right after the market opens and enter the trade if the price continues to move upward. 
• When to use: This can be used right after earnings, news, or strong market cues. 
• Risk vs Benefit: Loss may occur if the gap gets filled, but gains might be generated quickly if the move continues.  
• Example: If a stock gaps up from 1500 to 1550, a call option purchased right after the market opens can generate gains as the price rises further. 

Other Strategies 

Other strategies include covered call and married put. Here is a detailed explanation of these strategies.   

1. Covered Call 

• How it works: This strategy works by buying stock and selling a call option. 
• When to use: It can be used when neutral to mildly bullish. 
• Risk vs Benefit: The option buying strategy in this case will have limited gains since the upside of the stock is limited, and premium income will be included to offer safety. Buy when traders are anticipating slow or gradual upward trends. 
• Example: Traders buy a stock and sell a 1500 call on it. They earn the premium if the price stays below 1500, but the trader’s upside is limited above this level. It’s suitable for steady or slightly bullish markets. 

2. Married Put 

• How it works: The married put strategy involves buying a stock and purchasing a put option to cover. 
• When to use: This options strategy is useful for bullish traders who want some protection against possible downside risk.  
• Risk vs Benefit: Loss is limited because the put protects, while profit remains open if the stock rises. Works well for cautious long-term investing. 
• Example: Let’s say a trader purchased a stock at ₹1,600 and also bought a ₹1,500 put. If the stock rises, they earn gains, and if it goes down, then the put option ensures they can still sell at ₹1,500, limiting their loss. 

Advantages and Disadvantages of Option Trading 

Here are the advantages and disadvantages of option trading. 

What are the Levels of Options Trading? 

Options trading generally, has four levels assigned by a broker, which determine the approval given by a broker up to a certain level while the customer maintains a margin account. Here are the four levels of options trading.  

• Level 1: Using protective puts and covered calls when the investor or trader already owns the underlying security. 
• Level 2: Using straddles and strangles along with long call put option. 
• Level 3: The use of multiple options spreads that consist of buying and simultaneously selling the same underlying asset and expiration date. 
• Level 4: Writing (selling) options, such as naked options, with the risk of unlimited losses. 

Which are Some of the Best Options Strategies 

The following are some of the best option buying strategies that may help traders gain from different market conditions, whether prices move up, fall, or show a clear trend.  

• Bull Call Spread: It is a strategy that involves buying a call option at a lower strike price and selling another call option at a higher strike price. This strategy helps traders make gains from moderate upward movement while keeping the risk in control. 
• Bear Put Spread: This is done by purchasing a put option at a high strike price and selling a put option at a low strike price. This helps investors make gains during an average fall in the market. This also provides an opportunity for traders to gain a fair share of a slight drop in the market. 
• Moving Average Crossover Strategy: It is a simple trend-following method that uses two moving averages that is one fast and one slow, to identify the changes in the market direction. This strategy might be useful for traders who prefer momentum-based entries. 

Risk Management in Options Trading 

No advanced strategy is beyond the reach of risk management. Here are some basic principles to think about when taking  options trading strategies to the next level:  

• Position Sizing: Determine the portfolio percentage that will risk on a single trade. This limits the overall portfolio risk and prevents overexposure to one particular asset or even strategy. 
• Don't Over-Leverage: Higher leverage magnifies returns in both directions.  Traders should not use a higher degree of leverage than they can afford to lose without significant impact. 
• Stop Losses: One good practice could be using stop orders on the exit of the trade once the option's price moves against certain percent, for protection of capital and avoidance of emotional decision-making. 
• Diversification of Strategies: The use of varied strategies spreads risk over the variations in the market. This means that when one of the strategies is not rewarding, there is always the chance that the other one will cover up the loss. 

Conclusion 

New market participants may find options trading intimidating, but there are a number of option strategies that can limit risk and increase returns. Traders can explore effective option trading strategies for potential gains in the BlinkX stock market app. Some strategies, such as butterfly, have several offsetting options. For those already invested in the underlying asset, covered calls, collars, and married puts are among the options; straddles and strangles can be used when the market moves.