Common Option Trading Strategies Every Trader Must Know

Options trading may look more complex than it is. In general, options trading refers to the trading of instruments that give traders and investors the authority to buy or sell a particular security on a given date and price.  If you are looking to invest in options trading, it is necessary for you to know the most popular and common option trading strategies along with fast trading platform. Having such information would be of immense help to you in many ways in regard to options trading.

An option is essentially an agreement that’s attached to a given asset, like stock or another security.

For your reference, below are some of the common option trading strategies that must be known by almost every trader and investor.

Option Trading Strategies can be defined as buying calls or put options or selling calls or put options or both combined with an aim to control losses and make unlimited profits. Essentially, using one or more combinations for the most preferred result based on various set parameters.

Call options lend the trader the right but not a compulsion to buy the original stock while put options give the owner the chance to sell the primary stock at a pre-defined price by a given expiration time.

 

Option Trading Strategies can be categorized into bullish, bearish or unbiased option trading policies. Now, let’s know more about option trading strategies:

  1. Bull Call Spread:

It is necessary to keep in mind that both the calls must have the same original stock with the same ending date.

Under this, profit is realized when the price of the original stock goes up which is equivalent to spread minus total debit and loss is experienced when the stock price slumps which is equal to the net debit.

This strategy is found to be a wonderful substitute to only choosing a call option when the traders are not belligerently bullish on a particular stock.

  1. Bull Put Spread:

This is another popular bullish options trading strategy that is chosen by the options traders when they get a bit bullish on the crusade of the original stock.

This strategy can be compared to the bull call spread in which puts are purchased instead of buying calls. This strategy encompasses the purchase of 1 OTM Put option and the sale of 1 ITM Put option.

A bull put spread is developed for a net credit or net amount bagged and it experiences profit from an increasing stock price that is restricted to the net credit expected. However, the possible loss is capped to a certain extent and occurs when the price of the stock drops below the strike value of the long put.

  1. Call Ratio Back Spread

The Call Ratio Back Spread is thought to be one of the easily adopted options trading strategies which are executed when one remains extremely bullish on a stock or index.

In this type of strategy, traders can make unlimited profits when the market goes up and limited profits if the market goes down. The loss is incurred only if the market remains active within a specific range. In other terms, stock traders tend to incur a profit when the market moves in any of the directions.

This strategy is a 3 level strategy that includes the purchase of 2 OTM call options and the sale of 1 ITM call option.

  1. Synthetic Call

A Synthetic Call is a prevalent option trading strategy that is used by traders and investors who have a bullish perception of the stock for an extended period of time but are also concerned about the shortcoming risks. This strategy paves way for limitless potential profits with partial risk.

The strategy involves buying put options that are hoarded and that have a bullish view. If the price of the original stock goes up, this will result in profits. However, if the price goes down, the loss will be restricted to the premium that is submitted for the put option. This strategy is very much like the Protective Put options strategy.

  1. Bear Call Spread
  2. A bear call spread is recognized for a total credit and profits accrued from either a declining stock charge or from time-lapse or from both. The possible profit in this scenario remains capped at the net premium got minus commissions and probable loss is restricted if the strike value goes above the strike price of the extended call.

According to one of the top 10 stock brokers in India, the possible profit is capped at the net premium received minus commissions, and this profit is achieved only if the stock price is at or less than the strike price of the short call.

  1. Bear Put Spread

A bear put spread is made up of a single long put with an upper worth value and a short put with a reduced strike value. Both the options have the same original stock and similar expiration date. A bear put spread is defined for a disposable debit (or net value) and profits as the original stock reduces in its value. Profit is restricted if the stock price dives below the strike value of the short put lower strike, and the probable loss is limited if the stock price goes beyond the strike value of the long put or upper strike.

So, here are some of the most commonly used options trading strategies that almost every trader should be aware of.

 

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