15 Best Options Trading Strategies That Every Trader Should Know

Traders often throw themselves into options trading with little understanding of the option strategies they can use. However, many alternative strategies both reduce risk and maximize returns. With a bit of effort, traders can learn to take advantage of stock options' flexibility and power with the best options trading strategies. 

Options trading can be complicated, but there are many basic strategies that most investors can use to improve returns, bet on market movements, or block existing positions.

Spreads include purchasing one (or more) options and simultaneously selling another option (such as options). 

What is meant by options trading?

The option contract gives the investor the option to buy (for a call option) or sell (for a put option) the underlying asset that depends on its type. Each option contract has an expiration date on which the investor can effectively exercise the option.

One essential thing about options is that they give investors the right, but not the obligation, to buy or sell assets (i.e., shares) at a price and on an agreed date.

This blog will discuss 15 such options trading strategies that every trader should know when trading options.

15 best options trading strategies a trader should know about

Bull call spread 

A bull call spread is a bullish trading strategy that involves buying an At-The-Money (ATM) call and selling an Out-Of-The-Money call.

Thus, both calls must have the same stocks and expiration date.

Again, this strategy is achieved if the underlying asset price is equal to the spread minus the net debit, and a loss occurs when the asset price falls similar to the net debit.

Net debt is the same as the premium paid for shorter bets minus the compensation for longer bets. Spread indicates the difference between higher and lower realization prices. Bull Call Spread helps protect against falling prices and also reduces profits.

This strategy works as an excellent alternative to buying a call option only if the traders are not aggressively strong on the stock.

Bull Put Spread

Well, this is one of the most robust options trading strategies. It can be implemented if they are bullish about the underlying asset's movement. The strategy is similar to a bull call spread, where instead of a buy call, we buy a put. This strategy includes buying 1 OTM Put option and selling 1 ITM Put option.

Thus, both placements must have the same underlying asset and expiration date.

The bull spread is formed for net credit as the net amount received. The gain from the asset price increase is limited to the net credit received. On the other hand, the potential loss is narrow and occurs when the asset price falls below the exercise price at the high setting.

Call ratio back spread

Call Ratio Back Spread is a straightforward option trading strategy, and this strategy is implemented when one is very strong in stocks or indices.

This strategy allows the traders to make unlimited profits when the market rises and limited gains when the market falls. A loss is only possible if the market stays within a specific range. In other words, traders can profit if the market moves in both directions.

Instead, this strategy is a three-legged strategy consisting of buying two ATM call options and selling one ITM call option. 

Synthetic call

A synthetic call is one of the options trading strategies used by traders who have a strong outlook for stocks in the long run but are also concerned about downside risks. This strategy offers unlimited profit potential with limited risk.

The strategy involves buying options to place the stocks we hold and where we have a strong outlook.

If the price of the put option increases, then we can make a profit, while if the price falls, then the loss is limited to the premium paid for the put option. The strategy is similar to the Protective Put Option strategy.

Now the world operates based on supply and demand and the stock market. So when you see that people are flying high during a strong market, there is always a lot in bear options trading strategies.

The group "Manu Mandoriyas" (Reference: Scam 1992) always hopes for a disadvantage. So let's continue the discussion and show bearish options trading options. 

Bear call spread

Bear Call Spread is one of 2 low-option trading strategies implemented by options traders with a "slightly bearish" market outlook.

This strategy includes buying 1 ATM Call option, a higher exercise price, and selling 1 ITM Call option, which is a lower exercise price. Thus, both calls must have the same stock and expiration date.

A bearish call spread is created for a net credit, and profits flow from this strategy as stock prices fall. The potential gain is limited to net credit, and the possible loss is limited to margin minus net credit. The net credit is the same as the premium received minus the premium paid.

Bear put spread 

This is like the Bull Call Spread and easy to implement. Traders implement this strategy when the market outlook is slightly bearish, i.e., when traders expect the market to decline but not so much. 

This strategy includes purchasing the ITM Put option and selling the OTM Put option. It should be noted that both placements must have the same underlying share and the same expiration date. 

This strategy is designed for net debit or net cost and profit when the underlying stock price falls.

Therefore, the profit is limited and equals the spread minus the net debit, and the loss equals the net debit. Net debt equals the premium paid minus the bonus received. 

Strip 

The bar is bearish in its neutral options strategy, including purchasing 1 ATM Call and 2 ATM Puts. However, it should be noted that these options must be purchased on the same basis and at the same exercise price, and at the same expiration date.

Traders make profits when the underlying stock price moves significantly up or down towards the expiration date, but generally, they make big profits when prices fall.

Synthetic put

Synthetic put is one of the options trading strategies implemented when investors have a bearish view of stocks and are concerned about the potential strength of that stock in the short term.

The gain of this strategy is achieved when the base price is reduced. So this strategy is also known as a long synthetic put.

Synthetic high put is referred to as this strategy has the same profit potential as long put.

Long and short straddles 

A long straddle is one of the most straightforward trading strategies for implementing a market-neutral option. Once implemented, profit and loss will not be affected by the direction in which the market will move. 

This strategy involves buying calls and putting options at an ATM. It should be noted that both options must be subject to the same standard, have the same expiration date, and also be subject to the same strike.

Short Straddle involves the sale of ATM Call and Put options, unlike Long Straddle.

Long and short strangles 

This is similar to a straddle, but the only difference between them is that - in a straddle, it is essential to buy call and put options at the ATM strike price while strangling ATM call and put options inclusive. 

Long Strangle includes purchasing a set of ATMs and call options from an ATM. Here the profit is infinite, and the maximum loss equals the net flow of premiums.

Short Strangle, therefore, includes the sale of options on the sale and settlement of ATMs.

Long and short butterfly 

This neutral options trading strategy combines bullish and bearish spreads with a fixed risk and limited profit. Options with higher and shorter exercise prices are the same distance from on-the-money options.

The long butterfly call spread includes purchasing one ITM call option, writing two ATM call options, and purchasing one ATM call option.

The short-term butterfly spread strategy includes selling one call option in cash, buying two call options in cash, and selling a call without money.

Long and short iron condor

The Iron Condor is one of the options trading strategies, which consists of two putts (one long and one short), two calls (one long and one short), and four exercise prices. All should have the same expiration date.

Upon expiration, the maximum profit is achieved when the underlying asset closes between the middle realizable prices.

Long call

In this trading strategy, the trader buys a call called "extension" and expects the asset price to exceed the exercise price until expiration. The growth of this trade is revealed, and traders can often get their first investment when the stock rises. 

The peak of long conversations is theoretically unlimited. If stocks continue to rise before the end, they may also remain higher. For this reason, lengthy discussions are one of the most popular ways to bet on rising stock prices.

The disadvantage of a long call is the total loss of your investment, $ 100. If the asset prices are below the exercise price, the call expires worthless, and you have nothing left. 

Covered call

A covered call is about selling a call option ("shortened") but with a turnover. Here the trader sells one call and buys an asset subject to the option, 100 percent of each call sold.

Holding assets can be a risky trade - a short call - to a relatively safe trade that can generate a profit. Traders expect the asset price to be lower than the exercise price at expiration. 

If the assets end up above the exercise price, the owner must sell the assets to the calling buyer at the exercise price.

The peak of the covered call is limited to the premium received, no matter how high the assets price is. So you can't do more than that, but you can lose more. 

Any profit you can make by increasing inventory will be refunded to you during the short call.

Long put

In the long put, a trader buys a put - the so-called "last" put - and expects the asset price to be below the exercise price when it expires. The culmination of this trade can be many times the initial investment if the value of the stock drops.

The peak of a long put is almost as good as a long call because the profit can be multiples of the option premium paid. However, the supply cannot be below zero and limit the peak, while a long call has a theoretically unlimited rise.

High positions are still an easy and popular way to bet on a stock drop and can be safer than digging into the stock.

Beginner tips to follow when trading options

• As a novice, you must follow some essential tips when trading options. First, don't panic and calm down for a while before you understand the concept of options trading.

• As an option buyer, all you are worried about is having a goal where you should go for call options based on the expiration date. This expiration will give you time to trade to start working on your support.

• But when it comes to writing options, you should always choose the one that has the fastest chance of expiration, after which you can quickly reduce your responsibilities. Furthermore, it is always recommended to find the cheapest one when buying options. This will give you a high chance of a profitable business. Therefore, the average conversion of such affordable options is much lower.

• In a way, this even suggests that the chances of successful trading are slim. This often leads to the conclusion that implied volatility and options are still undervalued. This way, you start a business for your benefit, and the profit potential can be huge.

• In addition, the risk of higher losses may be slightly lower if you plan to purchase options when implied volatility is very high.

Challenges to be faced during options trading 

Business opportunities have specific challenges that you must face to gain lucrative opportunities. This can be achieved by following some good profit strategies. Some of the significant challenges are:

• Options usually expire, unlike other stocks that come with an indefinite term. The trading duration is quite limited, and once without it, you will not get another chance in the specific life of the option.

• A low average is known as a long-term strategy. However, this strategy is less suitable for options because it has a limited life.

• Margin requirements will have a material impact on business capital requirements.

When choosing prices, taking into account various factors will bring certain obstacles for the bank in a favorable direction! On the other hand, several factors can destroy considerable profits in the short term, such as wasting time, paying dividends, and complying with regulations.

Related Questions (FAQs)

Is it better to trade options than stocks?

Options may be a better option if you limit the risk to a certain amount. Options allow you to earn a share-like return when investing a small amount of money, so they can be a way to limit your risk within certain limits. Options can be a helpful strategy if you are an advanced investor.

Is an options trading just a gamble?

Most people think that options trading is like gambling. But I'm strong at it. So, if you know how to trade options, or you can watch and learn from a trader like me, options trading is not a gamble but a way to reduce risk.

Can you lose a lot of money on options? 

You can lose more money if you invest in trading options in a relatively short period. This is different from buying stocks immediately. In that case, the lowest asset price would be $ 0, so you will lose the most of the amount you purchased it for.

Why are the options so cheap?

Out-of-the-money (ATM) options are cheaper than other options because they require stocks to move in bulk to be profitable. The more money the option is, the cheaper it will be because the stakeholder is less likely to reach the exercise price.

Final thoughts

You have read about the options of the option strategy in the guide above. Choosing a good broker for conducting options trades is the best option. So open a demo account and trade, and get ready to trade options today.

Just know a few strategies. If you want us to have a strategy, learn them very well. Before using any option strategy, analyze the current state of the markets (as the state of a particular stock). Make sure the market/stock outlook aligns with your winning strategy.