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Options trading strategies can be bullish, bearish, or neutral, with various call and put combinations forming the basis of these strategies. Traders must understand the risks and rewards before entering the options market. Smart Asset offers free educational resources.
Options trading strategy can be classified into three distinct categories: bullish, bearish, and neutral. Options are available to buy or sell in the form of calls and put options. Various call and put call and put combinations are the basis of both simple and complex options trading strategies. These strategies can be used to define the risks and rewards of the position.
The bullish option trading strategy is used when the trader anticipates an increase in the value of the underlying asset. The most basic bullish strategy is to buy a call. This strategy gives the trader the right to buy an asset at an agreed price on or before an agreed date. Buying a call exposes the trader to unlimited profit potential while limiting the risk of the premium paid for the option. Bullish spreads, call ratio spreads, and short positions are some of the many bullish strategies.
The bearish option trading strategy is used when the trader anticipates a decline in the value of the underlying asset. The most basic bearish strategy is to buy a put option. This strategy gives the trader the right to sell an asset at an agreed price on or before an agreed date. This also provides unlimited profit potential while limiting the loss to the premium paid for the option. Calendar spreads, bear spreads, and sell calls are some of the bearish strategies.
The neutral option trading strategy is used when the trader anticipates that the underlying asset will trade within a specified price range. The trader can profit from this type of trade if there is little directional movement in the asset. One of the classic neutral option trades is the covered call option, also called a write call. The trader could own or buy the asset and sell a call to collect the premium. Straddles, strangles, and butterflies are neutral strategies.
The buying and selling combinations of puts and calls can seem endless. Many options brokers have organized and automated many options trading strategies. Choosing the right option trading strategy for a particular trade or circumstance will require a time commitment.
Before trading, investors must learn and understand the risks involved and the rewards that are possible. The trader should not enter the options area without a good basic understanding of how options trading strategies work. There are many websites that offer educational resources at no cost to the trader.
Smart Asset.
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