"Which Options Strategy Has Highest Return?"

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Answered by Mr. OppiE

Hi Michele,

Many options beginners who do not understand the nature of options strategies tend to ask me this very same question of which one out of the hundreds of options strategies makes the most money over time. The obvious question is, if there is a single options strategy that is the best, why are the other options strategies created and are still used by professionals all over the world?

The real secret behind options trading success is that it is not about the options strategy but how accurate are you with your prediction and outlook on the underlying stock. What options strategies do is to allow you to maximize your profitability within your specific prediction and outlook on the price movement of the underlying stock. No matter which of the six possible outlooks (please read my tutorial on the Six Directional Outlooks In Options Trading) you think a stock is going into, there is an options strategy that optimizes your profitability. As such, the only question that remains is how accurate you are with your analysis and outlook. The more precise and accurate you are with your predictions, the more money you are going to make in options trading. Conversely, there are also options strategies that increases your chances of winning through profiting in more than one direction with lower profitability potential. Yes, options trading rewards accuracy in a way no other financial instrument can but it also gives you choices to trade with both in times of certainty and uncertainty.

Lets look at a very simple example.

Assuming QQQ is trading at $75 and you are generally bullish on QQQ. You are of the opinion that QQQ will rally indefinitely within the next 3 months and you decide to use a simple Long Call strategy and buy to open the $75 strike price call option for $1.20. By the end of the 3 months, QQQ rallied to $80 and you make $80 - $75 = $5 - $1.20 = $3.80 in profit.

Lets say in this same scenario, you are abit more precise with your outlook and you predict that the price of QQQ will rally to $80 within the next 3 months and you decide to optimize your profitability on this outlook by using a Bull Call Spread strategy. You buy to open the $74 strike price call option for $1.20 and sell to open the $80 strike price call option for $0.40. By the end of the 3 months, QQQ rallied to $80 as predicted and you make $80 - $75 = $5 - ($1.20 - $0.40) = $5 - $0.80 = $4.20 in profit.

As you can see from the above example, by being more accurate with your prediction on the underlying stock and using the correct options strategy to optimize on that outlook, you make $4.20 - $3.80 = $0.40 more in profit than when you are not as precise and accurate.

In conclusion, there is no such thing as the most consistent winning or most profitable options strategy. Your returns in options trading depends greatly on the precision and accuracy of your analysis on the underlying stock and your ability to use the correct options strategy in order to optimize your profitability in each specific scenario.