Popular Option Trading Strategies: Profit in bull and bear
market directions
Options trading allows a market trader many ways in which to
profit. Whether a stock goes up, sideways or even down, there
are options strategies that allow a trader to profit from any
move. Add to this the cost of a typical option, to that of the
cost of buying a stock and you can see that many investors who
might not have been able to trade are now active in the
marketplace. Risk is another factor playing into options
trader's minds. Although options are considered a riskier style
of trading verse stocks, there is generally less capital at risk
since the cost of buying an option can be only a fraction of the
original cost of buying a stock.
The most basic of options is the simple, buy and sell a call or
put. This is used as a low capital means of garnering a profit
on market movement. Options can also be used as insurance
policies in a wide variety of trading scenarios. You probably
have insurance on your car or house because it is the
responsible and safe thing to do. Options provide the same kind
of safety net for trades and investments. They also increase
your leverage by enabling you to control the shares of a
specific stock without tying up a large amount of capital in
your trading account.
Options can be used to offer protection from a decline in the
market price of a long underlying stock or an increase in the
market price of a short underlying stock. They can enable you to
buy a stock at a lower price, sell a stock at a higher price, or
create additional income against a long or short stock position.
You can also use option strategies to profit from a move in the
price of the underlying asset regardless of market direction.
There are three general market directions: market up, market
down, and market sideways. It is important to assess potential
market movement when you are placing a trade. If the market is
going up, you can buy calls, sell puts or buy stocks. Do you
have any other available choices? Yes, you can combine long and
short options and underlying assets in a wide variety of
strategies. These strategies limit your risk while taking
advantage of market movement.
The following list shows the variety of options strategies that
can be applied to profit on market movement, this is not a
complete list but a good place to start.
Bullish Limited Risk Strategies Bullish Unlimited Risk
Strategies Bearish Limited Risk Strategies Buy Call Bull Call
Spread Bull Put Spread Call Ratio Backspread Calendar Spread
Time Diagonal Spread Collars LEAPS Buy StockSell PutCovered
CallCall Ratio Spread Buy Put Bear Put Spread Bear Call Spread
Butterfly Long put Put Ratio Backspread Bearish Unlimited Risk
Strategies Neutral Limited Risk Strategies Neutral Unlimited
Risk Strategies Sell Stock Sell Call Covered Put Put Ratio
Spread Long Straddle Long Strangle Long Synthetic Straddle Put
Ratio Spread Long Butterfly Long Condor Long Iron Butterfly
Short Straddle Short Strangle Call Ratio Spread Put Ratio Spread
Learning more about the different uses of options can help you
to boost your trading success. Understanding these different
uses will give you the potential to beat the next person down
the street or your sophisticated options market maker. You have
a chance to look at different scenarios that they do not have
the knowledge to construct. All you need to do is take one step
above the next guy for you to start making money. Luckily the
next person, typically, does not know how to trade creatively.