Good options strategies

As mentioned, the primary idea behind options lies in the strategic use of leverage.

If done systematically, options trading can be safer than purchasing stocks directly. Why so? One can get the same shares exposure to Fastly by purchasing 1 Call Option equivalent to shares. This is the max amount that one can lose in this scenario. I believe that options buying and selling are both relevant options strategies. You just need to know your investment goal and the context in which you are executing these option strategies.

Are you going directional? Do you have a lower risk appetite? The covered call strategy is one of the safest option strategies that you can execute. In theory, this strategy requires an investor to purchase actual shares of a company at least shares while concurrently selling a call option. I can look to repeat the same process by selling another call option on PM and continue to generate income from this strategy. Pretty decent I would say. If you are already comfortable owning shares of a particular counter, the covered call strategy adds ZERO downside risk to your holdings.

It will help to reduce your overall investment cost. In my opinion, such a strategy is quite useful for dividend-paying stocks such as PM. One, since you own the physical shares of PM, you will be entitled to the dividends paid by the counter. More on that later. In general, if you have the intention of holding shares of a company long-term while continue to earn dividend income, a covered call strategy might just be the ideal safe options strategy to turbo-charge your income potential. Some might also say that such a strategy turns a non-dividend-paying stock into one.

Professional traders often use covered calls to improve the earnings from their investment.

Hence, an investor might wish to sell a call option on his long-term shareholdings when volatility is elevated. Ideally, this is done with a short date-to-expiration DTE since time value decay is the fastest in the last months of an option contract horizon. A diagonal spread strategy involves the investor to get into a long and short option position on the same asset but with different expirations and different strike prices. The primary idea behind this strategy is that as expiration dates get closer, time decay accelerates.

The accelerating time-value decay for the short-DTE option contract benefits me in this instance.

I will be left with an outstanding long call option with approx. I can then structure another diagonal spread by selling a short-DTE call option again another 30 days and generate another round of premium which will look to further reduce my cost. The PMCC is a cheaper alternative compared to the covered call strategy, the latter requiring the ownership of at least shares in a counter.

Instead, buying a Deep ITM call option achieves a similar effect of owning physical shares of the stock but yet at a much cheaper cost. Since a PMCC structure is not entitled to any dividends holding a long call option does not entitle you to dividends , there is no added incentive of owning the stock outright for a non-dividend-paying counter.

Lastly, my personal stock preference for diagonal spreads are selecting stable counters without significant price fluctuation, ideally counters with Beta less than 1. This will avoid the situation of pre-maturely selling, something which I will cover in the next segment. Still a decent profit over a short duration but now you will not be able to partake in further upside in the price of FB unless you roll the short leg, which will be an article for another day.

This is not something that a new option trader should be engaging in. A vertical options trade consists of 2 legs, similar to the diagonal spread.

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You go long an option and short an option with different strikes. However, the expiration period is the same. That is the key difference between a vertical as well as a diagonal spread.

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A vertical can be a debit strategy one in which you pay a premium or a credit strategy one in which you receive a premium. This strategy has limited profit potential, but significantly reduces risk when done correctly. The bear call spread and the bear put spread are common examples of moderately bearish strategies.

Mildly bearish trading strategies are options strategies that make money as long as the underlying asset does not rise to the strike price by the options expiration date. However, you can add more options to the current position and move to a more advanced 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.

Pros and Cons of Options Trading

Neutral strategies in options trading are employed when the options trader does not know whether the underlying asset's 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 price will increase or decrease.

Rather, the correct neutral strategy to employ depends on the expected volatility of the underlying stock price.

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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 , long condor Iron Condor , long 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 , short condor, short butterfly, and short calendar.

Following Black-Scholes option pricing model, the option's payoff, delta, and gamma option greeks can be investigated as time progress to maturity:. These are examples of charts that show the profit of the strategy as the price of the underlying varies. From Wikipedia, the free encyclopedia.

5 options trading strategies for beginners

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