Four Great Options Trading Strategies

Options give the holder the right, not the obligation, to buy or sell an underlying asset at a specific price before expiration. There are two types of options available: calls and puts. These options can help you determine the exact risk you are taking with an investment. Beginners have several options open to them when choosing a strategy but the four most useful are listed below.

• Covered Call

With the covered call option, you hold a long position in an underlying asset and sell a call against the asset. Your market opinion should always be neutral on the underlying asset. In this strategy, when it comes to risk vs. reward your maximum profit is limited and your maximum loss can be substantial. However, when the asset moves against you the short calls can offset some of your loss. Because of this, traders will use this strategy to match overall market returns through reduced volatility.

• Calendar Spreads

Calendar spreads help you establish your position by entering a short and long term position on the same asset with different delivery months (expiration dates). The point of this strategy is to have the quickly disintegrating premium working with you in the short term, faster than the disintegration in the long-term option you bought. The further ahead you go, the more volatility you buy. Occasionally you will hear Calendar Spreads referred to as Time Spreads so don’t let that confuse you if you’re new to options trading.

• Iron Condor

The Iron Condor strategy is considered the best options strategy for beginners. It’s a safe way to buy and sell options because you can’t lose on both sides of the trade. With the Iron Condor option, you pick a trading range for an underlying asset and sell option spreads around the range. Doing this spreads your risk out over a wider range of prices so you can exit any spread at any time. Traders who use this option are trying to be probability minded, systematic, and strategic.

• Bull and Bear Spreads

When you use a Bull Call Spread, you buy a call on an underlying asset while simultaneously selling a call on the same asset with the same expiration month and a higher price. Your likelihood for profit is limited but the good news is, so is your risk. In a Bear Put Spread, you buy a put on an underlying asset while simultaneously selling a put on the same asset with the same expiration month and a lower price. You should use this strategy when you think that the market is more likely to fall than rise.
When you’re using options trading strategies, you should always have a trading plan and an exit strategy. This is crucial for any trading and it is crucial that you stick to your plan. One of the biggest mistakes that options trading rookies make is not using a strategy. Always do your research and gear your options strategies toward your training goal.