Options trading is a popular method of trading for investors to take advantage of the stock market’s volatility and potential for profits. There are various trading options methods available to traders, ranging from simple strategies to complex ones. In this article, we will discuss the top 10 popular strategies of trading options.
A covered call is one of the simplest and most popular options trading strategies. In this stratergy, an investor sells a call option on a stock they own. The investor gains the premium for the call option, and if the stock price remains lower than the strike price of the call option, the investor keeps the premium and the stock. If the stock price increases higher than the strike price, the investor is obligated to sell the stock at the strike price.
In a long call, a bullish strategy, an investor purchases a call option on a stock they anticipate seeing its price rise. The call option’s buyer pays a premium and has the opportunity, but not the duty, to purchase the stock at the strike price. The investor can either exercise the option and purchase the stock at the striking price if the stock price climbs above the strike price, or they can sell the option for a profit.
With a long put, a bearish strategy, an investor purchases a put option on a stock they anticipate seeing its price fall. By purchasing a put option, the investor must pay a premium and is given the option but not the duty to sell the shares at the strike price. The investor has two options if the stock price drops below the strike price: either exercise the option and sell the stock at the strike price, or sell the option and make money.
In a bullish technique known as a short put, an investor sells a put option on a stock they think will appreciate in value. If the stock price drops below the strike price, the investor is compelled to purchase the stock at the strike price and earns a premium for the put option. The investor keeps the premium and is exempt from purchasing the stock if the stock price stays above the strike price.
Bull Call Spread
A bullish technique known as a “bull call spread” entails an investor purchasing a call option at a lower strike price and selling it at a higher strike price. Investor gains if the stock price climbs above the higher strike price and pays a net premium for the spread. The investor forfeits the net premium they paid if the stock price stays below the lower strike price.
Bear Put Spread
Buying a put option at a higher strike price and selling a put option at a lower strike price is known as a bear put spread. The investor gains if the stock price declines below the lower strike price and pays a net premium for the spread. The investor forfeits the net premium they paid if the stock price stays above the higher strike price.
An investor uses the iron condor, a neutral strategy, in which he or she sells call and put options at various strike prices and then buys call and put options at various higher and lower strike prices. If the stock price at expiration stays between the sold call and put options, the investor makes money on the condor and earns a net premium. The investor loses money if the stock price moves above the higher call option or below the lower put option.
When an investor purchases a call option and a put option at the same strike price, they are using a neutral strategy known as straddling. The straddle is purchased for a net premium by the investor, who stands to gain if the stock price dramatically swings above or below the strike price. The investor loses money if the stock price stays close to the strike price.
Buying a call option and a put option at separate strike prices, usually with the same expiration date, is a neutral technique known as a strangle. The strangle’s owner pays a net premium and makes money if the stock price significantly moves above or below the call or put strike price. This technique is similar to the straddle, but the strike prices are more apart, which lowers the possibility of profit while also making it less expensive to enter the trade.
A calendar spread is a neutral to bullish strategy where an investor buys a longer-term call or put option and sells a shorter-term call or put option with the same strike price. The investor profits if the stock price remains relatively stable or rises slowly over time, as the short option will expire worthless and the investor can sell another one. However, if the stock price moves too much, the short option can become profitable and the investor may have to buy it back at a loss.
These are the top 10 most popular methods of trading options. Traders can use these strategies to take advantage of different market conditions and express their opinions on the direction of stock prices via best stock investment apps like Kotak Securities. However, it is important to remember that options trading is risky and can result in significant losses if not managed properly. Traders should always do their own research and consult with a financial advisor before entering any options trade.