Investing in the stock market can be exciting yet challenging, especially regarding options trading. Understanding the options and strategies available is essential for any investor exploring this complex investment vehicle. This article will discuss 10 most successful options strategies that every investor should know.

Strategy 1: Covered Call

A covered call strategy is an options trading strategy where an investor sells a call option on a stock they already own.

How it works?

For example, let's say an investor owns 100 shares of ABC company, currently trading at $50 per share. The investor decides to sell a call option with a strike price of $55 and an expiration date of one month. The investor receives a premium of $2 per share ($200 total) for selling the call option.

If the stock price remains below $55 by expiration, the call option expires worthless, and the investor keeps the premium as profit. If the stock price rises above $55, the buyer may exercise the call option, and the investor must sell their 100 shares at $55 per share. While this means the investor misses out on potential gains above $55, they still profit from the premium received.

Strategy 2: Protective Put

The protective put strategy is a risk management technique investors use to protect against potential losses in a stock position. This strategy involves buying a put option, which gives the investor the right to sell a specific amount of the underlying stock at a predetermined price within a certain time frame.

By purchasing a put option, the investor can limit their potential losses if the stock price drops below the put option's strike price.

Strategy 3: Long Straddle

The long straddle strategy is a popular options trading strategy in which an investor simultaneously buys a call option and a put option with the same strike price and expiration date. This strategy is typically used when an investor believes that the underlying asset's price will move significantly in either direction but is still determining its direction.

Strategy 4: Bull Call Spread

The bull call spread strategy is an options trading strategy that involves buying a call option with a lower strike price and selling a call option with a higher strike price. This strategy is used when an investor expects a moderate increase in the underlying asset's price.

By purchasing a lower strike price call option, the investor can profit from the price increase, while selling a higher strike price call option helps to offset the cost of buying the first option.

Strategy 5: Bear Put Spread

A bear put spread strategy is a popular options trading strategy that allows investors to profit from a downward price movement in a stock. In this strategy, an investor first buys a put option with a higher strike price, which gives them the right to sell the stock at that strike price before the expiration date. This option is a form of insurance against a significant drop in the stock price.

Next, the investor sells a put option with a lower strike price, which obligates them to buy the stock at that strike price if it falls below it. The investor can offset some of the cost of buying the higher strike put option by selling this put option.

Strategy 6: Long Call Butterfly

The long call butterfly strategy involves buying two call options with lower and higher strike prices while simultaneously selling two with an intermediate strike price. This strategy is typically used when an investor believes that the price of an underlying asset will remain relatively stable shortly.

Strategy 7: Iron Condor

The iron condor strategy is a popular options trading strategy that combines a bear call spread and a bull put spread. Investors who believe that the price of an underlying asset will remain within a certain range over a set period use this strategy.

To implement the iron condor strategy, an investor would first sell a call option with a higher strike price and buy one with an even higher strike price, creating a bear call spread. It allows the investor to profit if the underlying asset's price remains below the higher strike price.

Strategy 8: Strangle Strategy

The strangle strategy is an options trading strategy that involves buying both a call option and a put option with different strike prices but the same expiration date. This strategy is typically used when an investor believes that the underlying asset's price will experience significant volatility but still determines the direction in which it will move.

Strategy 9: Calendar Spread

This strategy aims to profit from the difference in volatility between short-term and long-term options. To implement a calendar spread, an investor would typically buy a longer-term option and sell a shorter-term option with the same strike price.

One of the main advantages of a calendar spread is its limited risk. Any potential losses are offset since the investor buys and sells options. Additionally, calendar spreads can be profitable in various market conditions, including when the underlying asset remains relatively stable.

Strategy 10: Married put

The married put strategy is a popular options trading strategy for protecting a stock position from potential losses. This strategy involves buying a put option on a stock you already own. The put option gives you the right to sell the stock at a specified price, known as the strike price, within a certain time frame.

Takeaway

Understanding and utilizing various options and strategies can enhance an investor's portfolio management capabilities, providing profit generation and capital preservation opportunities. However, options trading involves inherent risks and complexities that require thorough knowledge and experience. Investors must educate themselves and seek professional advice before making informed and strategic decisions before trading options.