Most Successful Options Strategy

Traders use options because of their price changes, allowing them to make (or lose) a lot of money quickly. Various options strategies exist, ranging from simple to complex, with varying payoffs and illogical names.

There are two major types of options: the call and the put, which are used in different options strategies, regardless of their complexity.

We have listed popular and most successful options strategy, their reward and risk levels, and when a trader might use them. These trading strategies are straightforward, but they can make a person a lot of money - but there are risks involved.

What is an options market?

Options contracts are generally bought and sold on the Options Market. Investing in the Options Market allows investors more strategic and financial planning than buying, selling, or short selling stocks alone.

In addition to enhancing an individual's portfolio, options are considered powerful. For example, a contract grants you the right to buy or sell any underlying assets on or before a specified date grant, but not the main obligation!

Call options allow the holder to buy stocks, and the put options allow the holder to sell stocks. India's options market was founded in 2001, but the volatility hit in 2006.

Each investor's objective usually has an appropriate option scenario based on their situation. The power of options thus lies in their ability to enhance an individual's portfolio fully. In addition, they can increase income, offer protection, and even provide leverage.

For example, options can limit downside losses in a declining stock market.

Options can also generate recurring income. As well as being used for speculative purposes, like gambling on the direction of a stock, they are also often used for gambling.

Stocks and bonds are no free lunches. Options are not any different. Therefore, investors must be aware of certain risks involved in options trading before making a trade. Because of this, you usually see a disclaimer like this when trading options with a broker.

Risks are associated with options, and not all are suitable for everyone. It is likely to lose a substantial amount of money when trading options.

What is meant by options trading strategies?

As a derivative contract, options still give their holders the right (but not the obligation) to purchase or even sell a security at a given price at a coming future date. The seller of the option will charge a premium to the buyer for such a right.

Calls or put options are bought or sold to limit losses and gain unlimited profits. The concept of utilizing combinations based on our defined parameters to achieve the best possible result.

The call option holder has the full right to purchase the underlying stock, but not the obligation. At the same time, the main owner of a put option has the right, but not the main obligation, to sell the underlying stock at the predetermined price by the end of the expiration date.

Nevertheless, trading in options can be divided into roughly three types. First, there are bullish options strategies, such as the bull call spreads and bull put spreads. Secondly, there are bearish strategies, such as bear call spreads and bear put spreads.

Pros & cons of options trading

Pros

Options trading is a strategy with many advantages. Compared to futures trading and cash trading, options have many advantages. These include:

1. Cost-efficient

Leverage is huge with options. Using different strategies to maximize profit potential is known as leverage. A smaller amount of capital can somehow create bigger gains right here. Investors or traders can get the same exposure to stocks through options at a much lower cost.

2. Exceptional return potential

Options trading possess and offer much higher returns than the price of shares on cash. The percentage returns are found to be much higher compared to the lower margins as well as the same profitability. The simple stock purchase would have produced the same profits as the options if we had chosen the right strike.

3. Reduced risk

Trading options is considered a risky activity. However, options can also create risk-limited strategies; one is hedging. Therefore, the use of options is common for hedging positions.

The risk with options is the maximum loss equal to the premium paid to buy the series of options.

4. There are more strategies available.

You can trade options using a variety of strategies in the options market. For example, using call-and-put options with a wide range of expiries and strike prices, you can combine trades and create a sort of strategic position.

Cons

1. Liquidity is reduced

Liquidity is lower for stock options. Option prices and expiration dates differ for each stock, making it difficult for traders to enter and exit trades. This is probably the most major disadvantage of options trading.

2. The high commissions

Compared to futures or stock trading, options trading is more expensive. It requires full-service brokerage fees. You may be able to get lower commissions with some discount brokers.

3. Time decay

The time value of your options is lost while you hold them. The rate at which the value of an option contract declines with passing time is called time decay.

Expiration dates have a time decay effect, and as the date approaches, there will be less time to realize profits. No matter how much the underlying movement is, the premium value for a given call option thus decreases each day.

List of 10 best options trading strategies for beginners

1. Bull call spread

As one of the bullish option trading strategies, bull call spreads consist of buying an At-The-Money (ATM) call option and selling an Out-Of-The-Money call option. Ensure that both calls' underlying stock and expiration date are the same.

By applying this strategy, profit is made when the price of the underlying stock increases, which is when spread minus net debit, and loss occurs when the stock price falls, which is when the net debt is equal to spread.

Accounts' Net Debit amounts to the premiums paid for lower strikes less the premiums received for higher strikes. The variance between the higher and lower strike prices is the spread.

In addition to protecting when prices fall, bull call spreads limit profit amounts. So when traders are not aggressively bullish on a stock, this is a great alternative to buying a call option.

2. Bull put spread

When options traders are a little bullish on the underlying asset's movement, they can implement this bullish options trading strategy.

We buy put instead of buying calls in this strategy, similar to the bull call spread. One OTM Put option is bought, and one ITM Put option is sold in this strategy.

You should make sure both put options have the same underlying stock and expiration date. The bull put spread occurs when a stock price rises and the spread incurs profits no greater than the net credit received.

On the other hand, the short put has a limited potential loss when the stock price drops below the strike price.

3. Call ratio back spread.

One of the simple options strategies is the Call Ratio Back Spread, implemented when one is very bullish on a stock or index.

By using this strategy, traders can earn unlimited profits when markets rise and limited profits when markets fall. The market can move either way so that traders can make a profit either way. The market can only lose if it stays within a certain range.

The strategy is a 3-leg strategy whereby two call options are bought OTM, and one is sold ITM.

4. Synthetic call

The Synthetic Call is a strategy used by those traders that have a long-term bullish view of the stock while also being concerned about potential downside risks. The risk associated with this strategy is limited.

Buying put options on the stock we hold and on which we have a bullish view involves buying put options on that stock. We will make money in a price rise, while a price fall will lose the premium it paid for the put option.

The strategy operates similarly to Protective Put options.

As with the world, the stock market works on demand and supply. Many people look at bearish option trading strategies when flying high in the bull market. There is always some "Manu Mandoriyas" (Reference: Scam 1992).

5. Bear call spread

Traders who hold a 'moderately bearish' view of the market implement this strategy as one of the two-leg option trading strategies.

The strategy entails purchasing one OTM Call option with a higher strike price and selling one ITM Call option with a reduced strike price. There should be no difference in the underlying stock or the expiration date in both cases.

In a bear call spread, profits can be made when stock prices fall. The spread-plus-net credit formula determines the maximum potential profit, while the spread-minus-net credit formula determines the maximum potential loss.

You arrive at the Net Credit by subtracting the premium Paid from the premium Received.

6. Bear put spread

A Bull Call Spread is a very similar strategy and easy to implement. The traders would implement this strategy when they expect the market to go down but not too much, i.e., when the view of the market is moderately bearish.

Using this strategy, you buy the OTM Put option and sell the ITM Put option. It is important to note that both puts should be attached to the same stock and expire on the same date. As the underlying stock price declines, this strategy is formed for a net debit or profit.

7. Strip

It is bearish to buy one ATM call, and two ATM puts in a strip strategy.

If buying these options, make sure the strike price and expiry date match, as well as the underlying.

Traders can profit when the underlying stock price moves in either a positive or a negative direction at the time of expiration. Still, typically, traders are best off when the prices move downward.

8. Synthetic put

An options trading strategy known as a synthetic put is used when a bearish view of the stock is held when investors are concerned about the stock's near-term strength.

This strategy is known as a long synthetic put because it profits from a decline in the underlying stock's price. Since this strategy has the same potential profit as a long put, the long synthetic put is named.

9. Long & short straddles

As one of the most convenient options trading strategies to implement, the long straddle does not matter the market's direction when applied.

Buying ATM calls and puts is part of this strategy. However, one should remember that the options must belong to the same underlying, have the same expiration date, and strike.

Unlike Long Straddle, Short Straddle involves selling ATM Call and Put options. As a result, there is an equal profit and loss because the total premium received determines the profit.

10. Long & short strangles

Strangles are similar to straddles, except that we are required to buy call and put options with ATM strike prices in straddles, while strangles ask to buy put and call options with the OTM strike price.

A long strangle involves buying a call option and a put option simultaneously. Net premium flow determines the maximum profit and maximum loss. Losses are unlimited regardless of price changes, and profits equal the total premium received.

Important tips to follow in options trading

Buying, selling, or even holding a stock for the long term requires that you have a clear and full sense of the asset's direction and understand the company's business. Investors in options must be hyper-aware of these things, too.

Investors need to understand the business's intrinsic value. Still, perhaps even more importantly, they need to understand how near-term factors, such as internal operations, sector trends, and macroeconomic factors, have affected the business in the past.

New options traders may find it easier to start with OTM call options since they are inexpensive. You can pick a winner if you buy a cheap call option.

If you are used to buying low and trying to sell high as a trader, you may feel like this is safe.  But there is still a need to research to find the appropriate one.

Traders of options need to control their emotions just like those who trade stocks. You don't have to swallow every fear in a superhuman way. Making a plan and following it is much simpler than that.

Options may add a needless layer of complexity to the financial lives of many investors. Options trading strategies for beginners guide can assist you in limiting your downside if you're interested in exploring the best opportunities that options afford.

Go for it if you have the capital and constitution to withstand any potential losses.

FAQs

1. Are options traders profitable?

Trading options can be profitable whether you are a buyer or a seller. Investing in options can help you achieve a profit during both volatile times and quiet or less volatile times.

2. Options trading: Is it better than stocks?

Stock prices can be volatile, but options prices can be even more volatile. That's why traders are attracted to the potential gains of these contracts. Generally, option strategies are risky, but some options strategies can help you boost your stock investment returns.

3. Can beginners trade options?

Making bets on the stock market is one way to think about options as a beginner. First, stock investments can be hedged with this type of investment, offering some protection against loss. Then, reliant on your trading strategy, you can use options to generate consistent income.

4. Is it a good option to trade options?

Options trading is the low-cost way for the speculators to go long or even short the market with the limited downside risk. As well as providing traders and investors with more flexibility, options provide more complex strategies such as spreads and combinations that can be profitable no matter what the market conditions are.

5. How can I learn options trading?

Studying the markets, taking a class, and using what you learn in real-time are the best ways to learn options trading. However, if you are interested in options trading courses for beginners, you might also want to investigate classes that discuss intermediate and advanced strategies.

Final thoughts

All in all, in any situation, options can be bought and sold easily without any hassle. However, they are not without their disadvantages. Researching and studying the market for a longer period will increase your knowledge and improve your experience regarding the most successful options trading strategy. 

For a layperson, trading options are more difficult, so you must be careful. As time decay runs against the option buyer, time plays a major role in trading options. Moreover, trading costs should also be considered when trading options.