Options Trading Strategies – Investing.com

This is a second blog in the series explaining Bearish including Buy Put, Sell Call, Bear Call Spread, Bear Put Spread and Put Ratio Back Spread and two more categories. Before moving forward, be sure to check out the previous blog in the series for the introduction to options trading strategies and bullish options trading strategies.

Bearish Options Trading Strategies

a) Bear Put Spread

A bearish put spread includes buying and selling put options for the same underlying security with roughly the same termination date but different strike prices at the same time. The difference between the two strike prices minus the net cost of the spread, including commissions, is the maximum profit that can be made. The maximum liability is equivalent to the cost of the spread plus commissions. Your risk is limited to the difference in premium, while your reward is limited to the difference in put option strike prices minus net premiums.

b) Spread of bearish calls

When the market is bearish, a two-legged options strategy called Bear Call Spread is used. A shorter call with a significantly lower price and a long call with a slightly higher level constitute a bearish call spread. Compared to buying or selling a call, the bearish call spread allows the generation of premium income with a reduced level of risk. When a trader believes that the price of the underlying asset will decline moderately, this approach is applied.

c) Put Ratio Back Spread

The put ratio back spread accepts that the trader uses it when he is pessimistic on the market or on a particular company. You profit whether the market goes up or down; however, the technique is more profitable if the market goes down. Depending on how it is constructed, a put ratio spread can have unlimited potential profit with limited loss, or restricted potential profit with the possibility of endless loss.

Neutral Options Trading Strategies

a) Iron Butterfly

Selling both a call option and a put option with almost the same strike price and time frame is a major principle behind this options strategy. A short call and a short put constitute the short straddle. The amount of profit that can be made is limited to the total amounts received minus commissions. A short straddle takes advantage of the asset’s underlying lack of volatility.

b) Iron Butterfly

Simultaneous operation of a short put spread and a short call spread. The spreads converge towards the strike price. An iron butterfly is a technique that uses four separate contracts to take advantage of stocks or futures prices moving within a defined range. Investors should be aware that their trade may cause a trader to buy the stock after it expires.

c) Short choke

A short call with a higher strike price and a short put with a lower strike price constitute a short choke. If the options are granted, a short strangle gives you the obligation to buy the shares at a specific price and the obligation to sell the shares at a different price. When the trader believes that the underlying stock has very minimal short-term volatility, this method can be applied. It is a strategy with limited profit potential and unlimited risk potential.

d) Short Iron Condor

The options strategy blends the vertical sell and buy spreads to provide investors with more flexibility when trading options. On the same underlying security, it combines a bullish and bearish vertical spread and thus justifies its “Neutral Behaviour”. The potential profit is limited to the premium received, likewise, the potential loss is also limited.

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