In this article, we will go over a few options trading strategies that pro traders love.
A common misconception with options is that there is very little money to be made from them. It could not be further from the truth, as traders make millions of dollars each year the most successful options.
One of the problems with beginner investors is choosing which strategy to use. There are hundreds of different strategies you can choose from, and it can be overwhelming. The simple fact is that many beginners try a lot of different trades, but they either lose or win a minimal amount at a time—only those who know what they’re doing start to see some success when trading options. Pro traders have been using profitable strategies for years, and they use these strategies most often.
The five main option trading strategies that pro traders love are long call or put, naked short call or put, covered write, bull or bear spreads and credit spreads. Each of them uses an entirely different approach in the way they work and what kind of trades they’re best for. When you understand how each strategy works, you will be better equipped to know when to trade them and how much money to put into them. If done correctly, these particular options trading strategies can generate hundreds of pips per month on every trade – if done correctly!
Let’s go over exactly what each one entails to get started with your own profitable options trading business.
Long Call or Put
A long call or put strategy entails purchasing the desired option. In the American stock market, each stock option contract covers 100 shares. The holder of a call option has the right to buy 100 shares of stock at any time up until expiration. The owner of a put option has the right to sell 100 shares of stock at any time up until expiration.
The choice is a type of derivative contract in which an investor or trader can use options to reduce their risk if they buy or sell a stock. A long option position acts as an insurance policy by setting a worst-case scenario and limiting your losses to the premium you paid for the option.
Naked Short Call or Put
A short call or put strategy entails selling or “writing” an option “naked,” which means without having a stock position. In the event of a sold call, the stock option seller is required to sell 100 shares of stock at the option’s strike price any time up to and including the option’s expiration date.
Covered Write
If you have an underlying long or short position in a security, you may sell call or put options against it. Many people choose to increase their income by selling covered calls in stable market conditions, which is sometimes known as a buy-write technique. If the option is ultimately exercised, you will have to deliver your stock holdings into the option contract.
This strategy protects you from incurring any potentially unlimited losses on the underlying position in the amount of the premium you obtain for selling the option. In addition, your profits are limited to the premium received above and beyond the option’s strike price. This approach has a similar payoff profile to a short option position.
Bull or Bear Spreads
You can use equally sized calls and put options to build bullish or bearish strategies with confined upside and downside. Both options in a so-called “vertical” spread will have the same underlying asset and expiration date, even though they have different strike prices.
Credit spread
Credit spreads are option contracts of the same class (puts or calls) on the same underlying asset purchased and sold simultaneously. When you buy a credit spread, you’re paying for the premium upfront while getting exposure to more potential gain. The bid price is less than the premium you get from selling an option.
The professional brokers at Saxo Bank have mastered the art of using options trading strategies. Check-in with them to see how it’s done.
