Traders always consider options as a complex financial instrument, which when played by an ignorant player, results in tremendous financial loss. It is inevitable for a trader of options to identify and thoroughly understand the option trading strategies that can guide him to manage his risk effectively irrespective of the turn taken by the market. Thinking strategically and take advantage of the timing for gaining maximum profit. The cost of trading options including the commission has to be retrieved from the transaction to make it productive.
Some of the simple strategies that guide the option trading are mentioned below:
Where the options trader expects a rise in the stock price, he employs bullish options strategy. The trader has to identify how far the prices will shoot up within the expected time frame before making the purchase. The strategies utilized vary with the level of bullishness exhibited by the market. In a mildly bullish market, the trader goes for small downside protection. In a moderately bullish market, an option trader prefers the bull call spread and the bull put spread strategies. Where the market is highly volatile in nature, the trader of options try to take advantage of high level of fluctuation by using the various option trading strategies like the long straddle, long strangle, short condor and short butterfly.
Bearish options strategies are employed when the options trader expects a downfall of the stock prices. He tries to identify the time frame left to his discretion to exert maximum advantage to select the best trading strategy. From simple put buying strategy utilized by beginners to the bear call spread and the bear put spread employed during moderately bearish strategies, and mildly bearish trading strategies are the various options strategies that can assist the trader to yield maximum profit during bear market with minimal loss. A trader of options can also make use of the short straddle, short strangle, ratio spreads, long condor and long butterfly in a highly volatile bearish market situation.
Where the option trader is not aware of the turn that will be taken by the market, he makes use of the neutral strategies to determine the price movements of the underlying stock prices. The neutral strategies or the non-directional strategies employed are guts, butterfly, and condor, straddle, strangle, or risk reversal.
Above all, the timing has to be carefully evaluated that can guarantee profitable entry into and exit from the market. Once the timings are clear-cut, identify the strategy to be employed based on the volatility of the market. Today with the markets remaining highly unstable this call for closer watch on the movements and trends displayed by the market for enhanced risk management. With better knowledge in the hands of the options trader, he is sure to make profits over and above the commission costs, costs of margin requirements, and other execution expenses.