As the market changes, people’s stock investing behavior also changes. This is also true about stock options trading strategies. Some investors categorize option trading strategies as bullish, bearish, and neutral strategies.
When the stock prices are rising, the market is referred to as bullish. Some options strategies for bullish markets include the long call, bull call spread, call back spread, covered call, and protective put.
The call back spread strategy has unlimited rewards with limited risk. The call back spread is selling at least one call at a low strike price and buying more calls at a higher strike price.
A protective put is also called a put hedge. This strategy is a way to protect the investor’s stocks from declining prices by buying puts to cover their shares. A covered call is writing calls for stocks that the investor owns.
The long call is often considered the most basic options trading strategy. Selling naked puts is common for investors who want to buy the stock for their portfolios at the strike price.
A market with stocks that are decreasing in value is described as bearish. Options strategies for bearish markets include a bear put spread, bear call spread, long put, and put back spread. The bear put spread and bear call spread are two low risk, low reward strategies when the underlying is expected to decline.
Writing a naked call is a more risky bearish trading strategy. An investor selling a naked call doesn’t own the underlying stock. The investor is expecting the stock to decrease or remain the same. If the investor is wrong and the stock price rises, the naked call strategy could have unlimited risk.
Neutral trading strategies can be for investors who prefer limited risk with limited rewards. Some neutral strategies are designed to make the most of a relatively stable value of the underlying asset. These strategies can also be used to make a profit from underpriced or overpriced options.
Examples of neutral options strategies include the butterfly, conversion, condor, long straddle, short straddle, long strangle, and short strangle. The conversion strategy is used by floor traders to profit from overpriced options.
The butterfly spread is a strategy with limited risk and rewards. The butterfly strategy can be used with all calls or all puts with the same expiry and for the same underlying asset. This strategy entails selling or writing two options at the middle strike price and buying two options. The options to be bought are at the higher and lower strike prices.
The condor strategy is similar to the butterfly except the options used are spread over four strike prices instead of three. The straddle and strangle options strategies are used by aggressive investors when the underlying is expected to remain relatively stable in value.
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