Strategies for Trading Options
Options trading strategy is one of the most complex subjects in options trading, but it's a subject that any options trader needs to be familiar with. There is a huge range of different strategies that can be can used when trading options, and these all have varying characteristics. Each one is essentially a unique type of options spread, which involves combining multiple positions based on the same underlying security into one overall position.
There are a number of reasons why these spreads are used and they are very powerful tools if you know how to use them correctly. Ultimately, it's the ability to create these spreads that makes options trading such a versatile and potentially profitable form of investment.
Although some of the strategies for trading options are quite straightforward and easy to understand, many of them are complicated and involve several different components. While it isn'tt essential to have a working knowledge of each and every strategy that can be used, you are far more likely to be successful and make money consistently if you have a good idea of which ones to use and when.
In this section, we provide detailed information on over fifty of the most commonly used options trading strategies and we also offer advice on how to choose a suitable one by taking relevant factors into account.
- Choosing an Options Trading Strategy
- Bullish Strategies
- Bearish Strategies
- Strategies for Neutral Market
- Strategies for Volatile Market
- Other Options Trading Strategies
We should point out that this section has been compiled to help you learn all about the various options trading strategies that can be used and how to choose the right one depending on a number of factors. To get the most out of this section, you should already have a solid understanding on the subject of options trading, how the market works, and what is involved.
Please spend some time going through some of the earlier sections of this site if you feel you don't have the necessary knowledge. Remember, if you come across any words or phrases that you are unfamiliar with, you can refer to our comprehensive Glossary of Options Trading Terms for an explanation.
Choosing an Options Trading Strategy
Choosing the right strategy at the right time isn't always an easy thing to do, because of the amount of different ones you have to choose from. However, which ones you choose and when will ultimately determine just how successful you are, so it's something that you really need to learn how to do.
It's possible to make money through simply buying options with a view to selling them later at a profit, and indeed some investors do generate profits in this way. The real money, though, is generally made by those that know how to employ different strategies and use the appropriate options spreads in any particular situation.
Successful options trading isn't necessarily just a case of forecasting which way you think the price of an underlying security move and then trading the relevant options accordingly. Your aim should really be to maximize your profits based on the amount of capital you have to invest and the amount of risk you wish to take.
To achieve this, you not only need to have a decent understanding of the different strategies you can use, but you also should know the different factors that you need to be considering when deciding which ones to use and when. We offer detailed advice on this subject on the following page; Choosing the Right Options Trading Strategy.
We have also devised a very effective tool that you can use to help choose the right strategy based on certain criteria. You can find this tool here. In addition, we have a simple alphabetical list of all the strategies we cover on our A-Z List.
These are options spreads that are used to generate profits when the price of an underlying security rises. Because of this, you would use them if you were anticipating an upward movement in the price of a financial instrument.
Please visit this page for more information, including a detailed list of strategies that fall into this category.
These are essentially the opposite of bullish strategies. They are used to profit from a downward move in the price of an underlying security, so you generally be advised to use them if you expected to see the price of a financial instrument fall.
For more details on this category, and a list of the relevant strategies, please click here.
Strategies for a Neutral Market
One of the biggest advantages of trading options is that is possible to make money when an underlying security doesn’t move at all in price. When the market is relatively neutral, meaning that there's not much price movement going on, stock traders and other investors can find it very difficult to find opportunities for generating profits. However, there are certain strategies that options traders can use in such circumstances.
For a list of these please visit this page.
Strategies for Volatile Market
A volatile market is when there's a lot of price movement going, but there's no obvious way to predict which way prices are going to move. When the stock market is volatile, for example, stock prices tend to fluctuate quite dramatically, but there's no clear direction for the market as a whole. Individual stocks can often go both up and down in a short space of time.
These circumstances can make it hard for stock traders to make money and trades tend to involve quite a lot of risk. However, there are options trading strategies that can be used to generate profits when the market, or a specific financial instrument, is particularly volatile.
Please visit this page for more information on using options to profit from volatility.
Other Options Trading Strategies
There are a number of other strategies that don’t particularly fall into any of the above categories, but they can be useful in certain circumstances or used for specific reasons. We have also compiled a list of these strategies, which can be found here.