Option strategies are the simultaneous, and often mixed, buying or selling of one or more options that differ in one or more of the options' variables. Call options give the buyer a right to buy that particular stock at that option's strike price. Put options give the buyer the right to sell a particular stock at the strike price.
This is often done to gain exposure to a specific type of opportunity or risk while eliminating other risks as part of a trading strategy.
Options strategies - Wikipedia
A very straightforward strategy might simply be the buying or selling of a single option, however option strategies often refer to a combination of simultaneous buying and or selling of options.
Options strategies allow traders to profit from movements in the underlying assets that are bullish, bearish or neutral. In the case of neutral strategies, they can be further classified into those that are bullish on volatility and those that are bearish on volatility. Traders can also profit off time decay when the stock market has low volatility as well, usually measured by the Greek letter Theta.
Bullish options strategies are employed when the options trader expects the underlying stock price to move upwards. The trader can also just assess how high the stock price can go and the time frame in which the rally will occur in order to select the optimum trading strategy for just buying a bullish option.
The most bullish of options trading strategies is simply buying a call option used by most options traders. The stock market is always moving somewhere or some how. It's up to the stock trader to figure what strategy fits the markets for that time period. Moderately bullish options traders usually set a target price for the bull run and utilize bull spreads to reduce cost or eliminate risk altogether.
There is limited risk when trading options by using the appropriate strategy. While maximum profit is capped for some of these strategies, they usually cost less to employ for a given nominal amount of exposure. There are options that have unlimited potential to the up or down side with limited risk if done correctly. The bull call spread and the bull put spread are common examples of moderately bullish strategies.
Mildly bullish trading strategies are options that make money as long as the underlying stock price does not go down by the option's expiration date. These strategies may provide downside protection as well. Writing out-of-the-money covered calls is a good example of such a strategy. However, Covered Calls usually require the trader to buy actual stock in the end which needs to be taken into account for margin.
This is why it's called a covered call. The trader is buying an option to cover the stock you have already purchased. This is how traders hedge a stock that they own when it has gone against them for a period of time. The stock market is much more than ups and downs, buying, selling, calls, and puts.
Options give the trader flexibility to really make a change and career out of what some call a dangerous or rigid market or profession.
Think of options as the building blocks of strategies for the market. Options have been around since the market started, they just did not have their own spotlight until recently. Bearish options strategies are employed when the options trader expects the underlying stock price to move downwards.
It is necessary to assess how low the stock price can go and the time frame in which the decline will happen in order to select the optimum trading strategy. Selling a Bearish option is also another type of strategy that gives the trader a "credit". This does require a margin account. The most bearish of options trading strategies is the simple put buying or selling strategy utilized by most options traders. Stock can make steep downward moves.
Moderately bearish options traders usually set a target price for the expected decline and utilize bear spreads to reduce cost. This strategy can have unlimited amount of profit and limited risk when done correctly. The bear call spread and the bear put spread are common examples of moderately bearish strategies.
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Mildly bearish trading strategies are options strategies that make money as long as the underlying stock price does not go up by the options expiration date.
However, you can add more options to the current position and move to a more advance position that relies on Time Decay "Theta". These strategies may provide a small upside protection as well. In general, bearish strategies yield profit with less risk of loss.
Neutral strategies in options trading are employed when the options trader does not know whether the underlying stock price will rise or fall. Also known as non-directional strategies, they are so named because the potential to profit does not depend on whether the underlying stock price will go upwards. Rather, the correct neutral strategy to employ depends on the expected volatility of the underlying stock price. Neutral trading strategies that are bullish on volatility profit when the underlying stock price experiences big moves upwards or downwards.
They include the long straddle , long strangle , short condor Iron Condor , short butterfly, and long Calendar. Neutral trading strategies that are bearish on volatility profit when the underlying stock price experiences little or no movement. Such strategies include the short straddle , short strangle , ratio spreads , long condor, long butterfly, and long Calendar or Double Calendar.
These are examples of charts that show the profit of the strategy as the price of the underlying varies. From Wikipedia, the free encyclopedia. This article has multiple issues.
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Optimal Replication of Options with Transactions Costs and Trading Restrictions on JSTOR
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