What Is The Most Profitable Options Strategy in 2022?

Ah yes, the good ol' options!

If you're seeking a way to invest strategically and thoughtfully, options are the way to go. They're an ideal way to broaden your investment portfolio.

But, more importantly, what is the best profitable option strategy?

Let's throw some water on this subject and see which options trading method is the most successful.

Before going further down the lane, let's define options.

What are options?

Options are contracts through which you can buy/sell an asset. It's identical to stock trading but with a contract twist.

Depending on the type of derivative contract, you can purchase or sell it. The contract has 100 stock shares, and you must pay a specified sum for each contract. It is a premium payment.

If an option has a premium price of $1 per contract, for example, you must pay $100 ($1 x 100).

The premium fee has a time limit attached to it. You must use it before the expiration date, just like you would use it when buying milk.

Options, like buy and sell, have put and call options.

Put options allow you to sell an asset at a predetermined price on a certain date. On the other hand, call options will enable you to purchase an asset at a specific price within a specified period. 

Things don't end there for options, as the put and call options have two types. 

• Buy call – This call option allows you to buy an option at a certain price

• Sell call – With the sell call, you already have the contract in this option, and you are looking for a buyer. 

• Buy put – With buy put, you own/not own the asset, and you buy the option to sell it later for a certain price.  

• Sell put – In sell put, you own the asset, and you are looking for a buyer to sell your contract. 

Remember that if you buy a call or a put, the most you can lose is the premium you paid, and you are not obligated to buy or sell.

The premium reflects your maximum gain when selling a call or a put, and you must sell if the buyer exercises their option.

You might be thinking about why we're using the term "specific price." It is the price of a strike.

The striking price determines how a contract can be bought or sold.

The striking price for call options is the price at which you can buy an asset, whereas the strike price for put options is when you may sell the stock.

Let's use an example to demonstrate:

Assume you intend to buy 1000 shares of a stock for $2 each. However, you may not have that type of cash on hand, or you may be concerned that the price may decline.

So, for $2000, you purchase a $2 per share option contract. This agreement is for one month.

The stock price soared a few days later due to their new idea. The share price has risen to $10. So you take advantage of your deal and invest $20,000 on shares worth $200,000. You will make the following profit:

The difference between $200,000 and $20,000 is $180,000.

Let's have a look at what happens if you lose.

The price of the shares falls to $0.5. You may let your option expire worthlessly and just lose $2,000 in the process.

So that's how it works with options trading.

10 best options trading strategies

Ok, let's move to the 10 best options trading strategies. 

1. Covered Call 

One strategy is to just buy a naked call option when it comes to calls. A basic covered call or buy-write can also be developed. It is a popular strategy since it creates revenue while lowering the danger of going long on a single asset.

You are willing to sell your shares at a specified price with covered calls—the short strike price as a trade-off. As usual, you buy the underlying stock and simultaneously write or sell a call option on those identical shares to implement the strategy.

You can employ this technique when you have a short-term holding in the stock and a neutral view of its direction. You could choose to sell the call premium to make a profit or hedge against a future decrease in the underlying stock's value.

2. Bull call spread 

A long call with a lower strike price and a short call with a higher strike price make up a bull call spread. The underlying stock and expiration date are the same for both calls. A bull call spread is set up with a net debit (or net cost) and gains when the underlying stock price rises.

When an investor is optimistic about the underlying asset and predicts a slight growth in its price, this vertical spread approach is commonly utilized. The investor can restrict the trade's upside while lowering the net premium cost by using this method.

3. Bull put spread 

A bull put spread comprises one long put and one short put with a higher strike price. Both put options have the same underlying stock and expiration date. A bull put spread is constructed for a net credit (or net amount received) and gains from growing stock prices, time erosion, or both.

The potential profit is fixed to the net premium paid minus fees, and the potential loss is not too much if the stock price falls below the long put strike price.

4. Protective collar

When you already own the underlying asset, you may use a protective collar approach by buying an out-of-the-money (OTM) put option and concurrently writing an OTM call option.

Traders adopt this method after a bullish position in a stock has achieved significant gains. The long put helps lock in the possible sale price, giving investors downside protection. However, they may be forced to sell shares at a higher price, so forfeiting the opportunity for more earnings.

5. Married put 

Like the covered call, the married put is a little more advanced than a basic options strategy. It "marries" the two by combining a long put with the underlying stock. You buy one put for every 100 shares of stock.

This technique allows investors to keep a stock in their portfolio for possible growth while also hedging their position if the stock declines in value. It functions the same way as insurance does, with the owner paying a premium in exchange for protection against the asset's depreciation.

6. Butterfly spread 

Butterfly spreads are options strategies that combine bull and bear spreads with defined risk and profit cap. These spreads are designed to be a market-neutral strategy that pays out the most if the underlying asset does not move before the option expires.

Four calls, four puts, or a mix of puts and calls with three strike prices are used.

There is a range of butterfly spreads to choose from. Long call, short call, long put, short put, iron butterfly, and reverse iron butterfly spread are some of the options.

7. Straddle strategy 

A straddle is a neutral options strategy in which you buy both a put option and a call option for the same underlying securities with the same strike price and expiration date.

Straddles are classified into two types: long and short.

A long straddle is an options strategy used by investors who believe a specific stock will shortly experience volatility. You feel the stock will move significantly outside its trading range but are unsure whether it will move higher or down.

A short straddle is a strategy that requires selling both a call/put option with the same strike price and expiration date. It is used when the trader feels that the underlying asset will not move considerably higher or lower throughout the term of the options contracts.

8. Strangle 

In a strangle strategy, you buy a call and a put option with different strike prices but the same expiration date. 

If you believe the underlying asset will have a major price fluctuation shortly but are unclear of the direction, strangle is a suitable technique to use.

Again like a straddle strategy, a strangle has two types. They are long and short strangles. 

In a long strangle options strategy, you buy a call with a put option with separate strike prices. This approach is used by a trader who feels the underlying asset's price will change dramatically but is unclear in which direction it will go.

One short call with a higher strike price and one short put with a lower strike price make up a short strangle. This is because both options have the same underlying stock and expiration date, but their strike prices are different.

9. Iron condor 

An iron condor is a strategy that consists of two puts (and long and a short one) and two calls (long and short), as well as four strike prices with the same expiration date.

Typically, the spread sizes on the put and call sides are identical. This trading method earns a net premium on the structure and is intended to profit from stock with minimal volatility. Many traders employ this method due to the perceived high likelihood of making a little premium.

Iron condor also consists of two types; long and short.

10. Synthetic put 

The synthetic put is an options strategy that simulates a long put option by combining a short stock with a long call option on the same asset. A synthetic long put is another name for it.

A synthetic put is a capital preservation strategy rather than a profit-making plan. As a result, synthetic puts are frequently used as an insurance policy against short-term price increases or a hedge against an unanticipated upward move in stock prices.

Which is the most profitable options strategy?

Many traders have a different say regarding the most profitable options strategy. However, considering the strategies mentioned above, the covered call stands out. 

For long-term investors, selling covered calls is a common technique. Picking the correct stock to sell the option is crucial to covered call strategy success. 

Simple covered calls perform well as long as the stock price remains below the contract's strike price. It also limits possible losses by preventing you from losing the premium you earn from selling the option. The strategy's biggest risk is that you will miss out on profits if the value of your investments rises too rapidly.

Here are the three main pros of using a covered call:

First, premium payment is received from the buyer when you sell a covered call. This method can help you make money every time you sell a call if you want to make money from your holdings.

It can assist you in determining a target selling price for your stock. For example, you can use covered calls to set a greater selling price than the current market price.

Even if the stock sinks to zero and the shares become worthless in the worst-case scenario, the loss is limited, unlike other options methods that may expose investors to endless losses.

If you're ready to start trading options, covered calls might be a smart place to start. Selling a covered call may be more profitable than owning the stock in some instances.

Factors to consider for the most profitable options strategy

If you are looking for stable profitability in options trading, you have to remember a few factors. 

Bullish or bearish

Are you looking to go long or short on a certain asset?

Are you a complete bull/bear or somewhere in the middle, if that's the case?

Which sector are you aiming for? Is there a current trend in the industry?

These questions might help you figure out your long-term options strategy, strike price, and when to begin the trade.

Volatility

Volatility is a core part of your long-term options strategy. We are well aware that the market does not work in our favor. It makes its own decisions.

If there is a lot of volatility, you should avoid buying any options. If the volatility isn't too high, on the other hand, go for it.

Strike Price and Expiration date

The strike price expiry date is the most important determinant for long-term profitability.

If you want to retain options for a long period, expiration might occur. However, as time passes, the strike price climbs.

For example, you don't want to pay more than $1 on the call option. Which option would you choose: a two-month option with a strike price of $10 for your available $1 or a three-month option with a strike price of $15 for your available $1?

Of course, as a long-term trader, you would choose the three-month option, but it is more expensive.

This is most likely the sole disadvantage of investing in long-term options.

However, you can also choose a short-term strategy and avoid the higher cost.

Pros and Cons of Options Trading 

Pros of options trading

• Getting an options contract is less expensive than buying an asset. Beginners may use options trading to evaluate how the market will respond before buying or selling.

• Traders can lock in a price without buying an asset by trading options. For example, if you're following Amazon stock and believe it'll climb, you may choose a call option to buy Amazon shares at a specific price on a specific date. If your analysis is true, you will be able to buy Amazon stock for a lower price than it is now trading on the open market. On the other hand, if your forecast is incorrect, your losses are equivalent to the contract's price. The critical point is that a standard stock option contract only controls 100 shares.

• You may use options trading to mitigate your losses in a very volatile market. If you have buy positions and the asset's price is falling, for example, you might choose the put option and sell the asset to recoup your losses.

Cons of options trading

• Unlike an option buyer, an option seller can sustain losses over the contract price. Remember that when an investor writes a put or call, he or she is compelled to buy or sell at a particular price within the timeframe indicated in the contract, even if the price is unfavorable.

• Anyone who trades options must have a minimum of $2,000 in their brokerage account, which is an industry regulation as well as an opportunity cost to consider.

• Some options trading strategies involve the opening of a margin account. It is essentially a credit that acts as collateral if the trade goes against you. If the balance dips below the margin level, your broker can issue a margin call.

Conclusion

So, these are the most profitable options trading strategies. All of the strategies we mentioned are profitable in one way or another. Remember that options trading is a bit complex for beginners.

So, it's best to do a thorough analysis before jumping in. Also, it's essential to define your risk appetite.