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Home > Options Strategies
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Option Strategies Introduction
Option Strategies, or Options Based Investment Strategies, are calculated ways of using options singly or in combination in order to profit from one or more market movements.
Option Strategies are a direct alternative to traditional buying and selling of stocks and offers greater profit potential with limited risk.
Choosing which option strategy to use starts from your opinion on the underlying stock. Option
strategies are merely the means through which you transform your "prediction" of future stock movement into money through option trading.
Option Strategies give options traders the versatility to profit from any opinions that they have on an underlying stock and to limit risk even if that opinion moves against them. The creative use of Options Strategies makes
stock options the most versatile financial instrument in the world
today. See A Full List Of Option Strategies Here.
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Classification of Option Strategies
Broadly, Option Strategies are classified under 5 categories : Bullish Strategies, Bearish Strategies, Volatile Strategies, Neutral Strategies and Arbitrage Strategies.
Here, you get to learn all of these Option Strategies for free!
 Sadly, there are still many fake option trading gurus out there
teaching these option strategies for thousands of dollars.
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Choosing Option Strategies
If you are of the opinion that a stock will go up, you will use a bullish option strategy.
if you
are of the opinon that the stock will go down, you will use a bearish option strategy.
If you are of the opinion that a stock will go up or down drastically, you will use a volatile option strategy and
if you
think the stock will stay stagnant, you will certainly use one of the many neutral option strategies.
if you
see a price discrepancy, you will be able to lock in some arbitrage profits with options arbitrage strategies.
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At this point, you must have
noticed that option trading is extremely versatile and does give certain level of protection when your prediction on
the underlying stock is inaccurate but in order to reach the maximum profit potential of each option strategy, your prediction on the
movement of the underlying stock still needs to be fairly accurate. The good news is, option strategies allows you to profit not only
from just one direction but potentially in many directions and that certainly gives you a winning edge.
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Position Trading
Option Strategies that uses options in combination are called Position Trading. A "Position" in trading terms simply means
any trades that you have open in your trading account. A "Position" in option strategies terms is one or several option contracts of the
same or different types, working
together to produce one's desired reward/risk profile. Such Positions can benefit from an UP, DOWN or
even NEUTRAL move in the underlying instrument or asset.
There are even ways to construct positions which benefit from more than one direction of movement. There are option strategies
which profit from both an UP and DOWN movement or even an UP and NEUTRAL movement just to name a few.
Read the tutorial on the different Options Trading Styles.
Basic And Complex Option Strategies
Option Strategies also vary in complexity. Some option strategies are very straightforward and easy to execute, however, other
option strategies can be highly complex and requires a strong understanding in option greeks in order to balance the delta or theta of a
position before executing it. There are also option strategies which require a significant amount of money to execute due to margin requirements or
which require the broker to allow the use of credit spreads.
These characteristics lead to the classification of option strategies into "Basic" or "Complex". Beginners should follow the "Basic" option strategies
outlined here and become thoroughly familar with them before trying "Complex" options strategies.
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What Are Volatile Option Strategies?
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Volatile Option Strategies or sometimes known as "Backspreads" are option positions that are constructed to profit when the underlying instrument moves either Up or Down. This kind of strategy
is especially useful when the underlying instrument is expected to move strongly but is uncertain in which direction. Such a condition is known as a volatile market or volatile stock
and thus the name "Volatile Option Strategies". A trader who uses Volatile Option Strategies are known as a BackSpreader. Volatile Option Strategies are not only capable
of profiting when the undering instrument moves up or down strongly but also when the underlying instrument stay stagnant as implied volatility
increases. An example of such a
circumstance is when a company is pending an important approval on its new and important product line. The approval of which is certain to move
its stock price up greatly but a disapproval could cause its stock price to plunge greatly.
Here is a list of Basic Volatile Option Strategies:
Long Straddle
Long Strangle
Long Gut
Here is a list of Complex Volatile Option Strategies:
Short Butterfly Spread
Short Condor Spread
Reverse Iron Butterfly Spread
Reverse Iron Condor Spread
Read the full tutorial on Volatile Options Strategies.
Wondering what option strategy to use? Try our Option Strategy Selector!
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What Are Options Arbitrage Strategies?
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Options arbitrage is the locking in of risk free profits when
put call parity
in the options market is violated. Such violation results
in temporary mispricing of certain options contracts which can be locked in using options arbitrage strategies. Such opportunities are
rare and get corrected very quickly and are therefore for professional institutional options traders with sophisticated monitoring software to capitalise on such opportunities.
Here is a list of Options Arbitrage Strategies:
Box Spread
Strike Arbitrage
Conversion & Reversal Arbitrage
Wondering what option strategy to use? Try our Option Strategy Selector!
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What Are Neutral Option Strategies?
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Neutral Option Strategies, or sometimes known as "Frontspreads", are option strategies that are constructed to profit when the underlying instruments stays sideways or stagnant. Neutral Option strategies
profits mainly from option premium decay of options that you sell or "write". Even though these are known
as Neutral Option Strategies, it does not mean that they are capable of profit only when the underlying asset stays completely stagnant. Most Neutral Option Strategies profit
as long as the underlying asset remains within a price range. Furthermore, some Neutral Option Strategies like the Condor Spread, allows one to predetermine the
price range within which a position is profitable.
Here is a list of Basic Neutral Option Strategies:
Covered Call
Collar
Here is a list of Complex Neutral Option Strategies:
Short Straddle
Short Strangle
Butterfly Spread
Condor Spread
Iron Condor Spread
Iron Butterfly Spread
Covered Put
Read the full tutorial on Neutral Options Strategies.
Wondering what option strategy to use? Try our Option Strategy Selector!
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"Spreads" is the term used to describe an option strategy that consist of going long (Buy to Open) one kind of option and simultaneously going short
(Sell to Open) another option of a different strike price and/or expiration date on the same underlying instrument. For example, buying May50Call and
simultaneously selling May55Call is a spread. Buying May50Call and selling June50Call is a spread too.
"Spreads" in option strategies are different from the "Bid-Ask Spread" of a stock option contract. A Bid-Ask Spread is merely the difference between
a stock option contract's bid and ask price.
Spreads confer on the option position varying degrees of protection when the underlying stock do not move as predicted. They allow the position to profit from the premium of the short options as in many of the Neutral Strategies, or even profit from more than one possible directions of move.
There are many different types of option spreads:
1. Diagonal Spreads :
When stock options of different strike price and different expiration date are used.
Example : Buy July50Call, Sell May45Call.
2. Ratio Spreads
When the number of stock options bought and options sold are different.
Example : Buy 1 contract of July50Call and sell 2 contracts of July55Call.
3. Vertical Spreads
When stock options of the same expiration date but different strike prices are used.
Example : Buy July50Call, Sell July55Call
4. Calendar / Time / Horizontal Spreads
When stock options of the same strike price but different expiration dates are used.
Example : Buy July50Call, Sell May50Call.
Read the full tutorial on Options Spreads.
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Knowing these classifications are
not necessary for the execution of option strategies. These classifications only help option traders understand the different option
strategies easier. Beginner option traders should not confuse yourselves with these classifications.
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Options involve risk and are not suitable for all investors.
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