Top 5 Option Strategies To Know for Traders
Often times, entrepreneurs and traders will begin buying, trading, and selling stocks with preciously little understanding of the various options strategies there are. If this includes you, the result is you’ll be maximizing the risk your taking and minimizing the potential rewards.
Fortunately, you can easily learn about the various options strategies and their pros and cons so this doesn’t happen to you.
Here are the top five options strategies to know:
1. Covered Call Strategy
There are many call options strategies but the covered call strategy in particular is the best option for when you want to purchase assets outright. After purchasing the assets, you would then sell a call option using the same assets.
So long as the number of assets you own are equal to the assets of the call option, you will be able to earn a profit. Overall, this is a great strategy to use for if you want to generate profits during a period of decline for the value of an asset.
2. Bull Call Spread Strategy
With the bull call spread strategy, you purchase call options at a strike price, and then later sell those calls at a higher price. You need to make sure that both of the call options have the same underlying asset and month of expiration. This is the best strategy to use if you expect an underlying asset to have a rise in price.
3. Protective Collar Strategy
The protective collar strategy means that you write a call option and purchase a put option simultaneously, with both options have the same underlying asset. The best time to utilize this strategy is when a particular stock you own has sharply increased in value, as it enables you to gain profits without actually selling your shares.
4. Butterfly Spread Strategy
The butterfly spread strategy combines the bear spread and bull spread strategies together with three separate strike prices. To use this strategy, you would purchase one call option at a lower strike price, while then selling two other call options at a higher price.
5. Iron Condor Strategy
The last options strategy we will discuss is called the iron condor strategy. It’s arguably the most complicated options strategy on this list.
To create the so called ‘iron condor,’ you would sell an out-of-the-money lower strike put option while buying another put option that’s even a lower strike, while selling a call option that’s higher strike and then buying another call option that’s even higher.
This will result in you receiving a net profit from the entire trade. There’s definitely more to it than that, but that’s a very brief summary of how the iron condor strategy works.
These are currently the five most widely used options strategies, and therefore the five that you are the most likely to use as well. Being aware of these strategies and the proper times to use them will prove to be invaluable to you as you go about trading stocks.