Options are very flexible and no-obligation financial instruments used to make money from different market conditions and/or to limit trading risks and exposure. Options strategies are methods to reach specific options trading goals and to better utilize different opportunities and market conditions. Unlike other financial instruments options enable traders to profit from any market conditions even in fast downtrends and in no price changes.
You will find a number of different alternatives trading strategies available now and new ones are invented everyday. A number of them are widely popular and followed however many others are trading secretes of some persons or groups. There are no strategies to profit from every market condition; in fact for successful implementation, many of them require some prerequisites. Options trading strategies could be simple which require normal trading platforms and include a couple of contracts/traders OR could be complex which require sophisticated trading systems and involves many contracts/trades.
With regards to the nature and implementation, options trading strategies can be categorized to 3 main groups as,
1. Bullish: They’re strategies which are utilized when the underlying product price is likely to go up. In other words the successful implementation requires price increase of the underlying product. Examples include short put, long call, synthetic long stock, bull spread, etc option tips.
2. Bearish: These are utilized when the underlying product price is likely to go down and successful implementation requires price decrease. Examples include long put, short call, bear spread, synthetic short stock, etc.
3. Non-Directional or Market Neutral: These strategies are utilized on expected price volatility of the underlying instrument and aren’t rely on price ups and downs. Success with these is achieved once the expected price fluctuation is achieved or not-achieved. Examples include straddles, strangles, butterfly, etc. Non-directional strategies can be further divided to two as bullish-on-volatility and bearish-on-volatility.
In addition to the above three main categories two other categories also exists which are event-driven and stock-combination strategies; the former expects/considers a certain event like mergers and takeovers and attempt to benefit from that and the later is complex tactics including combinations of trades or option types.
There are no options trading strategy that suit every trader. In fact the best choice should depend on many factors like the underlying product, market conditions and volatility, trader experience, access to quotes and sophisticated trading systems, brokerage service trader using, trader portfolio size and risk tolerance, long-term or short-term trading goals, and money management. Although, lots of today’s trading systems are pre-loaded to guide many popular strategies it’s a good idea to understand the maximum amount of strategies as possible and to create them readily available to you. The typical recommendation is that to implement simple one when you’re a starter and switch to more complex ones as you get to know more about different options, the marketplace and its movements.