Options Trading Strategies are becoming more and more popular throughout the years. These strategies are very diverse but once you use it right you will be surprised by its results. Unfortunately, despite its usefulness still, numerous investors are apprehensive to give it a try. What they don't know is when they use these wisely, they will be able to safeguard and expand their position. Options Trading Strategies are the perfect tools for individuals who are keen on Risk Management and Position Trading. The secret to its success is using the right strategy. There are primarily six different kinds of options trading strategies that people use:
Long call options trading strategy is appropriate for investors who are aggressive and who are very positive about an index or stock. Out of all the options trading strategies available, long call options are the most basic and the concept of the strategy is the easiest to grasp. When you buy it means you are positive on the stock. The risk is only limited to the premium; however, the reward is unlimited.
The advantage of this type of trading strategy is that the risk is only limited to the amount of premium you are paying. However, your potential return could be limitless. This is the way to go if you are bullish on the stock.
In long call options trading strategy, the investor is hopeful that the stock is going to increase long-term which explains the term "long call". The short call options trading strategy is the opposite of a long call wherein the investor anticipates the underlying stock to drop. In this strategy, the investor will sell call options when he or she expects the prices of the stock or index to take a nosedive. Unfortunately, this strategy limits your potential to earn profits.
There is a possibility that the investor will suffer from massive losses if the underlying price takes on the opposite direction meaning the price increases rather than decreases. This is a risky investment because the seller of the call can be susceptible to unlimited risk. This is the way to go if you are bearish on the stock. The risk for this type of strategy is unlimited. Meanwhile, the reward is restricted to the premium.
Use this strategy if you have a strong feeling that the price will go down eventually. This is considered risky because if the price increases, you will lose money. Another term for this strategy is Short Naked Call this is because the investor isn’t the owner of the stock that he or she is shorting.
What makes long put different from the long call? It is important to know that buying a put is not the same as buying a call it's the opposite. Buying a call means you are bullish about the stock but when you are bearish you’ll buy a put. With the put option, the buyer will have a right to sell the stock at a predetermined price to the put seller, therefore, minimizing his or her risk. If you are looking for a bearish strategy, this is the strategy to use. The reward is unlimited and the risk is restricted to the premium amount.
The long put strategy is when the investor is bearish on the stock price and so he buys put. However, it is important to mention that selling put is not the same as buying a put, its' the opposite. When an investor is bullish about a stock he or she will sell the put. In such a case, it signifies that the investor is optimistic that the price will increase. When an investor sells a put he or she will earn a premium from the buyer.
Assuming that the price increases well above the strike price, the seller will earn a profit because the buyer did not use the put. However, if the price dips below the strike price much more than the premium amount then the put seller will lose money and the loss can be unlimited.
In a long straddle options trading strategy it involves buying a call and a put at the same time under the same underlying stock. In this strategy, both the expiration date and the strike price remains the same. The best time to use this strategy is when the investor believes that the underlying stock will undergo major instability in the near future. The reward is unlimited and the risk is only restricted to the premium paid.
Last but not least, the short straddle options trading strategy is the opposite of long straddle. In this strategy, the investor expects the stock market to stagnate and not show any movement so he or she sells a call and a put on the same stock for the same strike price and maturity. The risk is unlimited but the reward is only limited to the premium. This is the strategy to use if the investor is convinced that the stock will show very little changes in the near term.
It is important to know the different types of options trading strategies so you can make an informed decision if you want to make money on stocks. If you need some guidance, Gorilla Trades can help you. Gorilla Trades is the complete solution for today's modern investor and has been a trusted resource for thousands of investors, stockbrokers, and fund managers for over 20 years. Whether you're interested in learning how to trade stocks, just starting to build your portfolio, or you're an experienced investor looking for powerful stock picks; take your portfolio to new heights with Gorilla Trades!
