Options Strategies To Know

It is too common for traders who jump into the options game with little or no understanding of how many options strategies are available which can minimize their risk and maximize return. With a little bit of extra effort, however, traders can learn how to take advantage of the flexibility and full power of options as a trading vehicle. While keeping this in the mind, we have tried to gather most useful & popular option strategies which we hope will shorten the learning curve and point you in the right direction.  There are some option strategies which might be useful for traders to hedge their positions and minimize the risk. In this addition of our market tutorial we will discuss only the type and brief description of some option strategies however in further additions we will discuss in detail.

Covered Call
Apart from purchasing a naked call option, you can also engage in a basic covered call or buy-write strategy. In this strategy, you would purchase the assets outright, and simultaneously sell a call option on those  same  assets.  Your  volume  of assets  owned  should  be equivalent to the number of assets underlying the call option.Investors will often use this position when they have a short-term position and a neutral opinion on the assets, and are looking to generate additional profits, or protect against a potential decline in the underlying asset's value.

Married Put
In a married put strategy, an investor who purchases a particular shares, simultaneously purchases a put option for an equivalent number of shares. Investors will use this strategy when they are bullish on the asset's price and wish to protect themselves against potential short-term losses. This strategy essentially functions like an insurance policy, and establishes a floor should the asset's price plunge dramatically.

Bull Call Spread
In a bull call spread strategy, an investor will simultaneously buy call options at a specific strike price and sell the same number of calls at a higher strike price. Both call options will have the same expiration month and underlying asset. This type of vertical spread strategy is often used when an investor is bullish and expects a moderate rise in the price of the underlying asset.

Bear Put Spread
The bear put spread strategy is another form of vertical spread. In this strategy, the investor will simultaneously purchase put options as a specific strike price and sell the same number of puts at a lower strike price. Both options would be for the same underlying asset and have the same expiration date. This method is used when the trader is bearish and expects the underlying asset's price to decline. It offers both limited gains and limited losses.

Long Straddle
A long straddle options strategy is when an investor purchases both a call and put option with the same strike price, underlying asset and expiration date simultaneously. An investor will often use this strategy when he or she believes the price of the underlying asset will move significantly, but is unsure of which direction the move will take. This strategy allows the investor to maintain unlimited gains, while the loss is limited to the cost of both options contracts.

Long Strangle
In a long strangle options strategy, the investor purchases a call and put option with the same maturity and underlying asset, but with different strike prices. The put strike price will typically be below the strike price of the call option, and both options will be out of the money. An investor who uses this strategy believes the underlying asset's price will experience a large movement, but is unsure of which direction the move will take. Losses are limited to the costs of both options

Butterfly Spread
All the strategies up to this point have required a combination of two different  positions  or contracts.  In a butterfly  spread options strategy, an investor will combine both a bull spread strategy and a bear spread strategy, and use three different strike prices.

Iron Butterfly
The final options strategy we will demonstrate here is the iron butterfly. In this strategy, an investor will combine either a long or short straddle with the simultaneous purchase or sale of a strangle. Although similar to a butterfly spread, this strategy differs because it uses both calls and puts, as opposed to one or the other. Profit and loss are both limited within a specific range, depending on the strike prices of the options used. Investors will often use out-of-the-money options in an effort to cut costs while limiting risk.

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