10 most useful Option trading Strategies and when to choose which strategy according to market situations

Option strategies

Option trading could be fascinating, also might sound complicated to some, but it is equally important to balance it with strategies and control emotions while focusing on trading, follow option trading strategies to obtain results while reducing risk and maximizing rewards.

Below are 10 most popular option trading strategies used for efficiently trading:

1. Long Straddle: This strategy is used when an investor purchases a call and put option simultaneously, here the underlying asset, strike price as well expiration date is same. This strategy is used when the price of the underlying asset moves significantly out of a specific range, but unsure of which direction the move will take. Hence, the investor gets to have an opportunity for unlimited profit. At the same time, the maximum loss that can be experienced is limited to the cost of both options contracts combined. Use when Market Situation: Highly Volatile


2. Long Strangle: This options trading strategy is applied when the investor purchases a call and a put option with a different strike price: an out-of-the-money call option and an out-of-the-money put option simultaneously on the same underlying asset with the same expiration date. This option trading strategy is used when the underlying asset's price will experience a very large movement but is unsure of the direction. Strangles will mostly be less expensive than straddles since the options purchased are out-of-the-money options. Use when Market Situation: Highly Volatile


3. Long call Butterfly: Here, an investor will combine both a bull spread strategy and a bear spread strategy along with three different strike prices having the same underlying asset and expiration date. To ensure a long butterfly spread purchase, order 1 in-the-money call option at a lower strike price, while selling 2 at-the-money call options and buying 1 out-of-the-money call option. This strategy is used when prediction states the holdings will not move much before expiration. Use when Market Situation: Less Volatile


4. Iron butterfly: In this option trading strategy, an investor sells an at-the-money put and buys an out-of-the-money put and sells an at-the-money call and buys an out-of-the-money call having the same expiration date for the underlying asset. Unlike Butterfly spread here both calls and puts are utilized. It has a combination of selling an at-the-money straddle and buying protective wings. The long, out-of-the-money call protects against unlimited upside. The long, out-of-the-money put protects against downside. Profit & loss are limited to a specific range, based on the strike prices of the options. This option trading strategy is liked by investors for the income it brings with higher probability of a small gain with a non-volatile stock. Use when Market Situation: Steady market situation


5. Iron Condor: In the iron condor option trading strategy, the investor holds a bull put spread and a bear call spread together. This is created by selling 1 OTM put and buying 1 OTM put of a lower strike i.e. bull put spread & selling 1 OTM call and buying 1 OTM call of a higher strike i.e. a bear call spread. Having the same expiration date on the same underlying asset. Since the put and call sides have the same spread width, this strategy earns a net premium on the structure & adds to advantage of a stock having low volatility. Investors choose this strategy for its expected high possibility of earning on a small amount of premium. Use when Market Situation: Highly Volatile


6. Bull call spread: In this strategy for options trading, an investor buys calls at a strike price while selling the same number of calls at a higher strike price together. Both call options having same expiration date & underlying asset. This creates a vertical spread strategy for an investor during bullish for market and hopes for a moderate rise in the price of the asset. Using this strategy, an investor can limit their upside on the trade while also reducing the net premium spent. Use when Market Situation: Market Expected Upside


7. Bear put Spread: This is a form of vertical spread. In this options trading strategy, the investor purchases put options at a specific strike price and sells the same number of puts at a lower strike price simultaneously. Underlying asset and expiration date staying fixed. Ensure bearish sentiment about the asset and expect the asset's price to fall downwards. Leading to limited profit and losses. Here the upside is limited, but premium spent is lowered as well. In case if you feel these outright puts being on higher end, you may dodge this situation by selling lower strike puts against it. Use when Market Situation: Market Downside


8. Calendar Spread: A calendar spread involves buying (selling) options with one expiration and simultaneously selling (buying) options on the same underlying in a different expiration timeline. These are used to bet on variation in the volatility term of the underlying asset. This option strategy requires low capital investment. It is profitable if asset does not make significant move in either direction till after near month expiry. Use when Market Situation: Steady Market situation


9. Synthetic call: A synthetic call strategy is an options trading strategy that uses stock shares and put options to move the performance of a call option. This gives the investor a huge growth potential with a specific limit to the amount at stake. To protect against decline in stock price buy at the money put option of the same stock. This strategy is also known as synthetic long call. For example: Buying a Rs.100 call option contract expiring in one month for Rs.50 and simultaneously selling a Rs. 100 put option contract at the same expiration date for Rs.40 Use when Market Situation: Market Upside


10. Synthetic Put: A synthetic put is also known as a married call or protective call. This options trading strategy combines a short position with a long call option on that same stock to imitate a long-put option. It's also known as synthetic long put. Essentially, an investor who has a short position in a stock purchases an at-the-money call option on that same stock. This action is opted to save against appreciation in the stock's price. Use when Market Situation: Market Downside

Bonus strategy

Covered call: This is a very popular options trading strategy since it brings income and reduces some risk of being long on the stock alone. The condition is that one must be willing to sell shares at a set price that being a short strike price. To execute this strategy, purchase the stock and simultaneously sell a call option on those same shares.

For example, suppose you are opting a call option on a stock that represents 50 shares of stock per call option, so for every 50 shares of stock that is bought, sell one call option against it. This strategy is referred to as a covered call because, if a stock price increases rapidly, the short call is covered by the long stock position.

Gist:

• Spread indicates buying options and selling simultaneously.
• Long straddles and strangles profit when the market moves either up or down.
• Covered calls are the options for those who have placed options order, while straddles and strangles can be used to define a position when the market is active.