4 best options trading strategies in 2021 • Benzinga

There are many popular options strategies that can allow traders in the financial markets to take a position incorporating a specific view of the market. Options strategies can also help investors protect or improve the performance of an underlying position. This article provides an introduction to the best trading strategies that anyone interested in using options should know.

The best options strategies:

  • Long Call or Put
  • Naked short call or sale
  • Covered writing
  • Bullish or bearish spreads

Choose an options strategy

There are many classic options trading strategies out there, but not all of them are suitable for every trader or investor at some point. You should make sure to use strategies that are suited to your personal risk tolerance and encapsulate your view of the market throughout the life of the included options. For example, selling naked puts or calls or using a covered write strategy can potentially put you at unlimited risk of loss if your view of the market turns out to be wrong.

Make sure you can bear any potential losses before you trade in options, as unwinding option trades before expiration may result in additional unforeseen costs due to trading spreads, time from inception. of the transaction and changes in implied volatility or other option pricing factors.

A common way for traders to visualize the risk and reward taken when using a particular options strategy is to plot the profit or profit and loss (P&L) profile of the strategy at its date of completion. expiry. These charts usually show the profit or loss displayed on the Y axis and the levels of the underlying asset displayed on the X axis. Folds in the plotted profile of the strategy usually occur at strike prices of all the options she understands.

Once an experienced options trader has mapped out the profitability profile of any options strategy they are considering choosing, then their trained eye can often quickly see whether the strategy would be suitable to take advantage of their market outlook. without exceeding his risk tolerance.

Best options trading strategies

Some of the most popular options trading strategies that almost anyone can understand and implement if they have the power to execute are below. These involve the use of one or more options with a single expiration date.

Long Call or Put

A long buy or sell strategy is simply to buy the desired option. On the US stock market, each stock option contract is for 100 stocks. A stock option holder has the right to buy 100 shares on a call or sell 100 shares on a put option at the strike price of the option at any time until at and including its expiration date.

Investors and traders can buy options in order to limit their downside risk when holding or short selling a stock. A long option position acts like an insurance policy by establishing a worse distribution price and a loss limited to your initial premium paid for the option in the event that your view of the market turns out to be wrong.

Let’s take an example where you have a bullish outlook and therefore buy a call option on 100 stocks with a strike price of A. Your downside is limited to the premium you paid if the market fell, while your benefit is potentially unlimited if the the market goes up. Your breakeven point is equal to the strike price of the option plus the premium paid.

A payout diagram of a long call option with an exercise price of A. Source: TheProphetOptions

In the option gain diagram above, the blue line represents the gain of a call option position. Losses are limited to the initial premium paid below strike price A, while the strategy’s breakeven point is the point at which the diagonal line crosses the X axis.

Naked short call or sale

A short buy or sell strategy is simply to sell or “write” a “naked” option, which means without having an underlying stock position. A seller of stock options has the obligation to sell 100 shares in the event of a sold call or to buy 100 shares in the case of a put sold at the exercise price of the option. at any time up to and including the option expiration date.

If your broker allows you, you can sell put or call options in order to cash in premium money when your market view is bullish or bearish respectively on the underlying stock. Although your profits are limited to the premium paid, your potential losses would be unlimited in the event that your view of the market is wrong.

Consider a situation where you are bearish and decide to sell 1 call option on 100 stocks with a strike price of A. Your decline is potentially unlimited if the market falls, while your rise is limited to the premium. that you received if the the market goes up. Your breakeven point is equal to the strike price of the stock minus the premium paid.

Short Call - Options Trading Strategies

A plot of the earnings of a written call option with an strike price of A. The strategy breakeven is the point where the diagonal line crosses the X axis. Source: Fyers

Covered writing

If you have an underlying long or short position in an asset, you can sell call or put options against it. Many choose to increase income from their stocks in relatively stagnant market conditions by selling covered calls, which is sometimes also referred to as a buy-sell strategy. If the option ends up being exercised, then you will need to deliver your underlying position in the option contract.

This options strategy amortizes any potentially unlimited losses you might incur on the underlying position by the amount of premium you receive for selling the option. In addition, your earnings are limited to the premium you received above the strike price of the option. Note that this strategy has the same gain profile as a short option position.

Suppose you sell a call option on 100 shares of a stock you own. If the stock price rises to the call strike price, you will simply deliver the stock to the call option when exercised, and any loss on the call option at the call option. -beyond this point is offset by gains on the underlying long position. If the stock price goes down, you will get the premium from the put of the call option to amortize any loss on your position in stocks.

Covered Call Option Writing - Option Trading Strategies

The payoff diagram of a covered buy strategy in which you buy 100 ABC stocks at $ 100 per share and sell a call option on 100 stocks with an exercise price of 100 for $ 5. As stated, the strategy has an equilibrium share price of $ 95. Source: VantagePoint Software

Bullish or bearish spreads

Options traders can use equal amounts of calls or puts to create bullish or bearish strategies with limited rises and falls. In a so-called “vertical” spread, the two options will have the same underlying asset and the same expiration date.

For example, a trader with a slightly bullish outlook might buy a call at a lower strike price and sell a call at a higher strike price. This strategy would have a reduced net premium over buying the lower strike price alone, although traders would not be able to profit from an increase in the underlying asset beyond the upper strike price of the call sold.

A bullish buy spread payout diagram that involves buying a call with a strike price of A and selling a call with a strike price of B. The breakeven point of strategy is the point where the diagonal line crosses the x-axis. Source: Fyers

Study additional trading strategies

Improving your understanding of the options market allows you to experiment with various trading strategies. Just as we advise readers to diversify their portfolios, you can also diversify your trading strategies. Consider looking for additional option strategies, including:

  • Iron Condor: Simultaneously hold a bullish buying and buying gap
  • Iron Butterfly: sell a put at the money, buy a put out of money and repeat the process as a hedge
  • Long Strangle: buy and put out of money and call out of money at the same time
  • Long Straddle: buy a put and a call at the same time
  • Collar of protection: purchase of a put and a write without money and a call without money simultaneously

Best Online Options Brokers

Not all online brokers will allow you to trade options, so be sure to select a broker that does. You’ll also want to check that any online broker you’re considering is properly regulated in their local jurisdiction and taking clients from your country. To make it easier to select a broker, the following table shows Benzinga’s choices for the best online options brokers.





Interactive brokers

Option commissions range from $ 0.15 to $ 0.65 per US option contract with Interactive Brokers. You can generate additional income with the Write / Rollover Options tool. The writing tool analyzes your stock positions and calculates the number of covered options to write compared to your unhedged stocks. Use the Rollover Tool to replace options that are about to expire with a similar option with a later expiration date.

The Options Portfolio continuously and efficiently scours market data to find low cost option strategies to align a portfolio with user-defined goals for Greek risk dimensions (Delta, Gamma, Theta and Vega).

Before you get started in options trading

If you are new to the options market, avoid getting started without fully understanding how these derivatives work and what the risks are in using them. Learn about options trading by reading books and articles written by experts – your preparation can help you avoid the pitfalls.

Plotting and reviewing the payoff profiles for any option strategies you plan to adopt also generally makes sense. This allows you to assess the upside and downside potential of an options trade, and lets you know when you may need to anticipate or take evasive action after a market change.

Frequently Asked Questions

Which options strategy presents the highest levels of risk?

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Which options strategy presents the highest levels of risk?

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Luc Jacobi

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Selling uncovered calls carries the most risk.

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What are the biggest mistakes in options trading?

1

What are the biggest mistakes in options trading?

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Luc Jacobi

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The most common include illiquid options trading, no exit strategy, and compensation for past losses.

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