12 Options Trading Strategies You Must Know

Options trading offers traders a versatile and powerful tool to capitalize on market movements while managing risk effectively. 

Unlike traditional stock trading, options provide the flexibility to profit from rising and falling markets, making them an attractive choice for investors seeking diverse opportunities. 

This blog article explores various options trading strategies that enable traders to unlock potential profits while limiting their risk exposure.

Options Trading Strategies

Options are financial derivatives that give traders the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price (strike price) within a specific timeframe (expiration date). By understanding the basics of options trading, traders can effectively leverage these contracts to generate profits.

1. Long Call Strategy

The long call strategy involves buying call options with the expectation that the price of the underlying asset will rise significantly. This strategy offers unlimited profit potential while limiting the risk to the premium paid for the options contract. Traders can benefit from price appreciation in the underlying asset without committing large amounts of capital.

2. Long Put Strategy

The long put strategy is the inverse of the long call strategy. Traders purchase put options when they anticipate a significant decline in the underlying asset's price. This strategy allows traders to profit from falling markets while limiting potential losses to the premium paid for the put options.

3. Short Call 

A Short Call option, also known as a "naked call," is an options trading strategy where the trader sells or writes a call option without owning the underlying asset. In this strategy, the trader must deliver the underlying asset to the option buyer if the buyer decides to exercise the option.

When traders enter a short-call position, they essentially take a bearish view of the underlying asset. They believe the asset's price will either remain stable or decline before the option's expiration date. The trader sells the call option hoping to profit from a decrease in the underlying asset's price or from time decay working in their favor.

4. Short Put

A Short Put option is an options trading strategy where the trader sells or writes a put option without owning the underlying asset. 

In this strategy, the trader takes a bullish view of the underlying asset and hopes to profit from either a stable or rising price of the asset before the option's expiration date. When a trader enters a short put position, they essentially agree to buy the underlying asset from the option buyer at the strike price if the buyer decides to exercise the option.

5. Long Straddle Strategy

A Long Straddle is an options trading strategy that involves buying both a call option and a put option with the same strike price and expiration date on the same underlying asset. The long straddle strategy is used when a trader expects significant price volatility but is uncertain about the direction of the price movement. 

The potential for profit in a long straddle is unlimited. The trader can realize a profit if the underlying asset's price makes a substantial move either up or down beyond the combined premium paid for both options. 

However, time decay, also known as theta, affects long straddle positions. As time passes, all other factors being equal, the value of both the call and put options will decrease, which can work against the trader.

6. Short Straddle

A Short Straddle is an options trading strategy where the trader simultaneously sells (or writes) both a call option and a put option with the same strike price and expiration date on the same underlying asset. 

The short straddle strategy is employed when the trader expects the underlying asset's price to remain relatively stable or experience only small price fluctuations. The potential profit in a short straddle is limited to the total premium received from selling both the call and put options. However, the risk is theoretically unlimited, as there is no cap on how far the asset's price can move in either direction.

7. Long Strangle

A Long Strangle is an options trading strategy that involves purchasing a put option at a low strike price and a call option at a high strike price at the same expiration. The long strangle benefits from an increase in implied volatility. Higher volatility increases the chances of significant price movements, potentially leading to larger profits. 

The risk in a long strangle is limited to the total premium paid for both the call and put options. If the price of the underlying asset remains relatively unchanged or experiences only small price swings, the trader's losses will be limited to the initial investment.

8. Short Strangle

A Short Strangle is an options trading strategy where the trader simultaneously sells both a call option and a put option on the same underlying asset with the same expiration date but different strike prices. The short-strangle strategy is employed when the trader expects the underlying asset's price to remain relatively stable within a specific range with low price volatility. 

The potential profit in a short strangle is limited to the total premium received from selling both the call and put options. However, the risk is still limited to a certain extent, as the price of the underlying asset cannot fall below zero or rise to infinity.

9. Protective Put

The Protective Put strategy, also known as a Married Put, combines purchasing an underlying asset with purchasing put options. This strategy protects traders from significant losses if the asset's price declines. While it involves the cost of purchasing put options, it safeguards against adverse market movements.

10. Iron Condor Strategy

The iron condor strategy combines a bull put spread and a bear call spread. Traders implement this strategy when they anticipate low price volatility in the underlying asset. The goal is to profit from the options' time decay as they approach expiration. The iron condor offers limited profit potential and limited risk, making it suitable for neutral market conditions.

11. Bull Call Spread

The bull call spread strategy involves buying a call option with a lower strike price and simultaneously selling a call option with a higher strike price. This strategy is ideal for moderately bullish market expectations, offering limited risk and limited profit potential.

The premium collected from selling the higher strike call option partially offsets the cost of buying the lower strike call option.

12. Bear Put Spread

The bear put spread strategy is the counterpart of the bull call spread. Traders buy put options with a higher strike price and simultaneously sell put options with a lower strike price. This strategy suits moderately bearish market expectations and provides limited risk and profit potential.

Conclusion

By unlocking the potential profits of options trading and limiting risk exposure, traders can confidently navigate the dynamic financial markets and achieve their financial goals.