Best Option Trading Strategies: Different Types of Option Trading Strategies

Best Option Trading Strategies: Different Types of Option Trading Strategies

Knowing the many trading methods that can be used to make the greatest return is important since the stock market is becoming more difficult to navigate on a daily basis.

Today's traders must comprehend that in order to optimise their profits from their trades, they should be aware of the best option trading strategy used by professionals rather than seizing the first chance they come across.

In online share trading, these strategies can reduce risk and increase earnings. Traders can discover how to benefit from any stock's flexibility with a little amount of work.

Different Options Trading Strategies

A call option offers the holder the right, but not the duty, to purchase the underlying asset before or on the expiration date at the strike price. A put option, on the other hand, grants the holder the right but not the duty to sell the underlying asset tied to the contract at the strike price prior to or on the expiration date. 

Call options are often used by investors when they believe the market is trending upward, whereas put options are typically used by investors when they believe the market is trending downward. 

The best option trading strategies for the Indian market are separated into three categories based on market trends: bullish, bearish, and neutral options strategies. 

Bullish options trading methods are employed by investors who believe that the price of the underlying asset will rise in the future. When they anticipate a decline in the price of the underlying asset, they use bearish options trading techniques. They use neutral trading techniques when they are unsure of the market trend.

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Table of Content

  1. Different Options Trading Strategies
  2. Bullish Option Strategies
  3. Bearish Options Techniques
  4. Strategies for neutral options
  5. Benefits of using the best option trading strategy
  6. Conclusion

Bullish Option Strategies

Investors that trade options and believe the market is bullish employ the following best options trading tactics to increase earnings while lowering the risk of losses: 

Bull Call Spread 

In a bull-call spread, a range is produced by using two call options with various strike prices. The underlying asset and expiration date of both options are the same. The investor and traders, however, simultaneously sell one call option that is out-of-the-money and purchase one call option that is at the money. 

If the price of the underlying asset, such as stocks, rises, the investor will profit from a bull call spread. This technique results in a loss if the stock price declines and a profit that is restricted to the spread of less net debt. 

Bull Put Spread 

An alternative to the Bull-Call spread in terms of options trading methods is the Bull-Put spread. By using two put options with different strike prices and the same expiration date, the investors may establish a range using this approach. 

However, the investor and traders simultaneously sell a put option that is in the money and buy a put option that is out of the money. 

Investors gain in this situation as well if the price of the underlying asset, such as stocks, rises on or before the expiration date. If the price of the underlying asset goes below the strike price of the long put option, this technique is designed to generate a net credit, or the net amount received while a loss is suffered. 

Back Spread with Call Ratio

Investors and traders buy two out-of-the-money call options while concurrently selling one in-the-money call option in this three-legged options strategy. The profit potential is limitless, but losses occur if the price of the underlying asset remains within a certain range.

Artificial Call

When an investor has an optimistic long-term outlook for the underlying asset but is also concerned about the downside risks, they will utilize a synthetic call. The tactic entails purchasing put options on the same underlying asset, such as equities purchased directly after forming a positive opinion. If stock prices increase, the profit potential is limitless, but the loss potential is only as much as the premium paid. 

Bearish Options Techniques

The financial market is volatile and dynamic; it derives its volatility from different outside market elements and has the potential to push the market into a negative trend. The following bearish options trading tactics are employed by options investors in such circumstances: 

The Bear Call Spread 

Using the same underlying asset and expiration date, this technique entails purchasing one out-of-the-money call option with a higher strike price and concurrently selling one in-the-money call option with a lower strike price. Because the method is designed for a net credit, investors earn if the value of the underlying asset decreases. The loss is only as much as the spread minus the net credit. 

The Bear Put Spread

Investors use this tactic, similar to a bear call spread, when they anticipate that the price of the underlying asset will decrease somewhat, but not significantly. In this approach, the investors sell one put option that is out of the money while concurrently buying one put option that is in the money. 

Strip

The Strip is a three-legged, bearish-to-neutral strategy in which investors purchase two At-The-Money put options and two At-The-Money call options, all with the same underlying asset, strike price, and expiration date. If the price of the underlying asset declines considerably at the time of expiration, traders profit from this technique. 

Synthetic Put

When they believe the market is in a negative trend and the underlying asset may lose strength in the near future, investors employ the synthetic put technique. Due to the fact that investors profit from the price drop of the underlying asset, the technique is also known as a synthetic long put. 

Strategies for neutral options

Investors that are unsure of where the price of the underlying asset will go use neutral options methods. The following neutral options trading methods are what they choose as a result: 

Short and Long Straddles

Purchasing In-The-Money call and put options with the same underlying asset, strike price, and expiration date is the basic market-neutral strategy known as the long straddle.

Selling At-The-Money call and put options with the same underlying asset, strike price, and expiration date constitutes the short straddle. This strategy's profit is equivalent to the premium that was paid, but its loss potential is limitless. 

Strangles, both long and short

Buying out-of-the-money call and put options sets the options strangle approach apart from the straddle options strategy. One Out-Of-The-Money call option and one Out-Of-The-Money put option are bought as part of the long strangle strategy. 

Selling an out-of-the-money put and an out-of-the-money call option makes up the short straddle. While the greatest loss is limitless, the maximum profit is equal to the premium paid.

Butterfly, Long and Short 

The options in this strategy are equally spaced out from the At-The-Money options and combine bull and bear spreads with restricted reward and fixed risk. In the long butterfly call spread, one in-the-money call option is purchased, two at-the-money call options are sold, and one out-of-the-money call option is subsequently purchased. 

The short butterfly spread entails selling one call option that is in the money, while purchasing two call options that are in the money, and finally selling one call option that is out of the money. 

Iron Condors, long and short

With separate strike prices and the same expiry date, this options strategy uses one long and one short put, one long and one short call, as well as one long and one short call. 

The iron condor approach, which has four legs as opposed to a bull put spread, offers lower risk and enables traders, investors, and inventors to profit from the market's low volatility. When the price of the underlying asset is between the middle strike price at expiry, the possibility for profit is at its maximum. 

Benefits of using the best option trading strategy

One of the most advantageous financial tools that investors may utilize to earn from the market is options trading. The benefits of it include:

Increased Leverage 

Options with Higher Leverage Contracts provide more leverage since investors may take options positions that are similar to stock positions but need less personal capital.

Limited drawbacks

Investors who purchase call or put options have the choice, but not the responsibility, to execute the transaction. It implies that they do not have to exercise the contract in order to incur losses if their holdings have not reached their chosen price.

Price in advance 

Investors can guarantee a specified amount if the contract is exercised by fixing the stock price using options contracts at a predetermined price. This enables them to protect their direct investment and guarantees that they may offset any losses. 

Conclusion

The best option trading strategy is a matter of opinion and is dependent on a number of variables, including your risk tolerance, investment objectives, market circumstances, and amount of expertise and understanding in the field. There isn't a single best option trading strategy that works for everyone and is always the best option to test different strategies for your trade. 

Best Option Trading Strategy FAQs

The use of methods in options trading depends on the direction of the market. In a bull market, bear market, or when the market is going sideways, you can apply bullish techniques, bearish strategies, or neutral methods. 

One of the most popular and straightforward options strategies is synthetic call.

The riskiest options are naked ones since they have an infinite potential for loss, such as covered calls and covered puts.

Consider aspects like your investment objectives, your knowledge of various methods, your risk tolerance, and the current state of the market when choosing the best option trading strategy for you. 

Your trading style, risk tolerance, and market circumstances will determine whether you adopt a single strategy or a combination of techniques.