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Thursday, April 25, 2024

Option Trading Strategies – Call Option and Put Option

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Introduction

Option Trading Strategies are defined as the purchasing of call options or put options, or the sale of call options or put options, or both, with the goal of reducing expenses and maximizing profits. Using one or even more alternatives to achieve the greatest feasible result depends on the defined parameters.

Option Trading Strategies - Call Option and Put Option

Call & Put Option

Call options offer the buyer the right to purchase the underlying stock, but the buyer is not obligated to complete the transaction, whereas put options provide the investors the right, but not the obligation, to sell the stock shares at a specified value by certain expiry date.

Option Trading Strategies

We will explore various option trading strategies that each and every investor ought to be mindful of while trading options in this article.

Bull Call Spread Option Strategy

A bull call spread is an options trading strategy that seeks to profit on a stock’s restricted value gain. The method employs two call options to generate a spread with a bottom and top market price. The bullish option spreads serve to reduce price loss while also capping profits.

Bull Put Spread Option Strategy

A bull put spread is an options strategy employed if the buyer anticipates the underlying asset’s value to climb somewhat. The bull put spreads are executed by an investor by purchasing a put option on a stock and selling a put option of the exact expiration date but at an elevated option’s strike.

Call Ratio Back Spread Option Strategy

A call ratio back spread is a bullish options strategy that entails purchasing calls and subsequently selling calls with varying strike prices but the same expiry date, utilizing a ratio of 1:2, 1:3, or 2:3. More calls are bought versus released in the call ratio back spread strategy.

Synthetic Call Option Strategy

A Synthetic Call is one of the option trading methods employed by investors who seem to have a long-term positive outlook for a company but are concerned about the negative risks. This method has limitless possible benefits while posing a little risk.

Bear Call Spread Option Strategy

A bear call spread is a multiple options strategy that entails selling a call option and earning advance premiums, followed by acquiring a secondary call option with the exact expiration date but a greater option’s strike.

Bear Put Spread Option Strategy

This approach is very identical to the Bull Call Spread and therefore is similarly very simple to apply. Investors could employ this technique whenever the stock’s outlook is mildly negative, i.e. where investors anticipate the price to fall but just not significantly.

Strip Option Strategy

A strip is a negative business technique that earns more when the underlying stock falls than it is when it earns when it rises. A strip is similar to a long straddle, except it uses two puts and one call instead of one of each.

Synthetic Put Option Strategy

To simulate a long put option, a synthetic put mixes a short stock position and a long call option on the same share. It is also known as a synthetic long put. In essence, a buyer who has a short share buys an ATM call option on the same share.

Long & Short Straddle Option Strategy

The long straddle is one of the quickest market-neutral option trading techniques to deploy, if used, the P&L is unaffected by stock markets.

Long & Short Strangle Option Strategy

The strangle is identical to the straddle, but the biggest distinction between them is, that buyers must buy call and put options with ATM strike prices, but the strangle requires them to acquire OTM call and put options.

Long & Short Butterfly Option Strategy

A butterfly spread is a neutral options trading strategy that combines bull and bears spreads with defined risk and a restricted gain. The strike prices of the options with upper and lower strike prices options are an equal range from the at-the-money options.

Long & Short Iron Condor Option Strategy

An iron condor is a type of options trading strategy that includes two puts (a long and a short) and two calls (a long and a short), as well as four strike prices. Every item should have the same expiry date.

Whichever options trading strategy you wish to choose make sure to do in-depth research on it as each has its pros and cons and one may suit you better than the others.

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