Welcome to Option Trading Strategies Main Index Page
Option trading strategies are about the way we construct an option position, or combination of positions, in order to minimize risk and maximise profit while at the same time, taking advantage of our current view of the underlying financial instrument. Whether we anticipate the future price action of the stock, commodity future, index or currency pair to be directional or range trading will influence the way we use options to take advantage of this and profit.
On the other hand, we may have reasons to believe that a large move in the underlying is imminent but aren’t sure which way it will go. This may be due to price patterns we observe on charts or impending news releases. There are some option strategies which are ideal for this scenario too. Some are well known while others, hardly anyone knows about.
Options have several advantages over other leveraged instruments such as CFDs or futures. While futures may provide unlimited profits if the underlying goes in the anticipated direction, your losses can also be unlimited if it doesn’t. With options on the other hand, your losses are always limited to the amount of your investment, unless you have ‘shorted’ or sold options without any covering long position. Most brokers won’t allow you to do this anyway, unless you have a large amount of capital to cover the potential consequences.
The other advantage with options is that you can construct a combination of long and short positions with different strike prices and either the same or different expiry dates. These extra dimensions of ‘strike prices’, option expiry dates, together with the ability to sell or ‘write’ option contracts as well as buy them, is the very thing that creates the opportunity for a number of option trading strategies.
So let’s take a look at what’s on offer. Some of these you may be familiar with because they are well known and taught by popular courses; others are well kept secrets used by professional traders.
Types of Option Trading Strategies
1. Range Trading Strategies
Long Iron Butterfly
The long iron butterfly is another range trading strategy and a variation of the Iron Condor. Both these strategies use two credit spreads one using calls, the other puts.
Calendar Spreads are a popular low risk, high profit potential, options strategy for traders who believe that an underlying security, is going to be trading within a range in the near term.
Butterfly Spreads are one of the most well known and popular option strategies out there today. Combining a debit and credit spread, they have huge profit potential, sometimes 300 percent.
Long Condor Spread
The Long Condor Spread is a setup that is attractive because, although you pay a bit more in brokerage, the risk to reward potential can be quite outstanding.
Iron Condor Spread
The Iron Condor Spread is really just two credit spreads combined, but facing opposite directions separated by a range in between. But it this gives it distinct advantages over credit spreads alone.
Iron Condor Option Strategy
In this iron condor option strategy we show you the best way to leg into positions safely and also to adjust your positions when they are threatened.
The short straddle strategy is normally considered to be a risky option trade due to potentially unlimited risk. However, if you use it with trading the underlying profits are almost certain.
2. Non-Directional Strategies
The Options Straddle
The great thing about an options straddle is that you don’t have to pick market direction. But success comes with knowing the right signals to look for.
A great Straddle Option Strategy
I’d like to share with you a straddle option strategy which I think works very well and at the same time, lowers your overall risk in each trade.
The Option Strangle
The Option Strangle relies on three assumptions: (1) No opinion as to the short term future direction of the underlying (2) That price action will become volatile (3) that the options are cheap.
Short Iron Butterfly
The short iron butterfly strategy is pretty much the exact reverse of the Long Iron Butterfly. It is best suited to the kind of price action you believe a price breakout is imminent.
Delta Neutral Trading Secrets
Once you understand how delta neutral trading really works, you can use it to adjust unprofitable positions to make them profitable again.
This little known strategy risks only a few dollars to potentially make hundreds or even thousands. Amazing!
3. Volatility Strategies
Option Volatility – Implied Volatility (IV)
Options arbitrage strategies take advantage of disparities that occur between put and call option prices. When this happens, risk free trading opportunities present themselves.
4. Directional Spreads
Before you trade option debit spreads, your policy should be to pay not more than 50 percent of the difference between strike prices. You get a distinct advantage over simple long option positions.
With credit spreads you can use option ‘time decay’ to your advantage and give yourself an 80 percent trading edge! You also have the flexibility to adjust your postions if it doesn’t work out. Here’s how …
The Ratio Calendar Spread
The beauty of the ratio calendar spread is that you make some profit if the underlying goes nowhere, more profit if it moves as you anticipate and maybe even some if it goes slightly against you.
Ratio backspreads are considered to be one of the safest longer term option trading strategies available today – so much so, that they have sometimes been called “vacation spreads”.
Ratio Spread Example
In this ratio spread example we discuss a variation of the concept to demonstrate how these trade setups can not only be safe, but given the right conditions, provide a huge return on investment.
Call Ratio Backspread
The call ratio backspread is a bullish options strategy. The appealing thing about this strategy, is that it involves limited downside risk when compared to just buying calls.
Bearish Options Strategies
Bearish options strategies are for those traders who believe the price action of the underlying asset will move downwards. We explore a number of strategies here.
Bullish Options Strategies
Bullish options strategies are for those traders who believe the price action of the underlying asset will move upwards. Long calls, bull call spreads, bull put spreads and other strategies are used.
5. Other Option Trading Strategies
Binary Options Strategy
Since binary options always have an absolute outcome (you either win or lose) then one of the most important factors in any good binary options strategy should be your money management program.
Dow Jones 30 Stocks – A Good Option Trading Strategy
Dow Jones 30 stocks option trading is about trading options on each of the individual stocks that make up the famous Dow Jones Industrial Average, not about trading the DJI index itself.
Don’t Just Buy Shares – Use Options to Get Them Cheap
Did you know that if you’re thinking of owning shares, you could be using options to buy stocks so much cheaper than if you just went to your broker and simply bought them at market price?
Risk Free Option Trading – Using Arbitrage
Is it possible to engage in risk free option trading and get away with it. The answer is ‘yes’! Here’s how …
Ratio trading is a relatively new options trading technique, used only by about the top one percent of all traders in the world. It needs to be distinguished from ratio spread trading.
Short Term Binary Options
Trading short term binary options can be quite an exciting way to make a living. Here we demonstrate trading strategies to successfully trade the 60 second and 5 minute time frames.