It takes skill to adjust the plan when life throws you a curveball — especially with investing your hard earned money. In my time standing in the trading pits of the Chicago Board of Trade, I was put in a number of high-pressure trading situations over the years. In this article, we will give an overview of just that: options trading strategies that can be utilized in different market conditions, whether the markets are bullish, bearish, stagnant or volatile.
Understanding simple options trading strategies can enhance a trader's profitability.
What are the benefits of options trading?
Options are one of the most versatile tools of the financial markets. Whether the market is moving up, down, or sideways, options allow investors to enter the market with lower cost and lower risk than trading the underlying asset on its own. All options trading strategies are built upon the two basic types of options: the call and the put.
There are two just types of options: one that gives you the right to buy the underlying contract, and one that gives you the right to sell the underlying contract. Need a refresher course?
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Read this Options Guide before going any further. Options can be structured in a number of ways, often in combination with other options. An options spread consists of taking a position on two or more different options contracts that are based on the same underlying security. With odd names and infinite combinations, options trading spreads are strategies that can range from very simple to quite complex, with a variety of reasons why a trader would choose each one.
Another term for a calendar spread is a time spread. The first version — horizontals — spreads contracts with the same strike price but different expiration dates. The second version — diagonals — spreads contracts with the different strike prices and different expiration dates. A horizontal call spread is a calendar spread where only calls are involved, and the contracts have the same strike price.
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Similarly, a horizontal put spread is a calendar spread where only puts are involved, and the contracts have the same strike price. A diagonal call spread is a calendar spread where only calls are involved, and the contracts have the same strike price. Similarly, a diagonal put spread is a calendar spread where only puts are involved, and the contracts have the same strike price.
A calendar spread allows a trader to potentially profit from time decay without requiring a large margin and also without being exposed to too much risk. The difference in strategy between a horizontal and a diagonal is dependent upon whether the trader anticipates movement in the underlying in the time period between the expiration dates of the first and second contracts.
This bearish strategy involves buying puts and selling an equal number of puts with a lower strike price. The contracts are based on the same underlying and have the same expiration date. This will result in a premium, meaning an upfront cost, because the options you buy will be more expensive than the ones you write. This bullish strategy involves buying calls and selling an equal number of calls with a higher strike.
In general, these strategies are employed to make a bet on the direction when you are reasonably confident of how far the price of the underlying will move. Since you will generally want to trade options online via a trading platform , having a relatively modern computer or mobile device connected to the internet is virtually a necessity. Many online brokers will allow you to trade options. Select a well-regulated broker that offers options on the asset classes you most want to trade along with a good options trading platform and tight dealing spreads.
Since options are more advanced trading instruments, you may also need to qualify to trade options via a particular broker. Rather than jumping right into trading options with real money, it makes sense to first practice trading options in a demo account. You can then incorporate them into an overall trading plan that lays out how you intend to operate your options trading business and manage your risk capital. Always make sure you have placed enough funds on deposit with your broker as margin to support your options trading strategies and trade only with money you can afford to lose.
When selecting an online options broker, keeping options trading commissions low is important to just about any trader. You also need to watch out for any hidden fees a broker charges for you to use their trading platforms or access market data. Take into account your planned trading style, your need for educational materials and any tools you think you will need to trade options successfully.
You will also want to watch out for any unregulated online options brokers that might be trying to scam you. Check to see that a broker is overseen by a major regulatory authority before funding an account with them. Note that options brokers may also check how much experience you have before giving you permission to trade options and may set limits on your options trading activities. To help you narrow your search, Benzinga has compiled a table below comparing some well-regulated online options brokers you can approach to trade options through.
Moomoo is a commission-free mobile trading app available on Apple, Google and Windows devices. A subsidiary of Futu Holdings Ltd. Securities offered by Futu Inc. Moomoo is another great alternative for Robinhood. This is an outstanding trading platform if you want to dive deep into smart trading. It offers impressive trading tools and opportunities for both new and advanced traders, including advanced charting, pre and post-market trading, international trading, research and analysis tools, and most popular of all, free Level 2 quotes. Get started right away by downloading Moomoo to your phone, tablet or another mobile device.
This publicly listed discount broker, which is in existence for over four decades, is service-intensive, offering intuitive and powerful investment tools. Especially, with equity investing, a flat fee is charged, with the firm claiming that it charges no trade minimum, no data fees, and no platform fees. Though it is pricier than many other discount brokers, what tilts the scales in its favor is its well-rounded service offerings and the quality and value it offers its clients.
Option Strategies
Tastyworks is a sophisticated options and futures broker aimed toward experienced traders. The platform was designed by the founders of thinkorswim with functionality and precision for complicated options trades and strategies. Tastyworks offers stocks and ETFs to trade too, but the main focus is options. Webull, founded in , is a mobile app-based brokerage that features commission-free stock and exchange-traded fund ETF trading. Webull offers active traders technical indicators, economic calendars, ratings from research agencies, margin trading and short-selling.
What are Options and What is Options Trading | Kotak Securities®
Trading options has several notable advantages over just trading the underlying asset. Some of them are discussed below. The leverage that trading options provides can allow you to control large positions with relatively little money. If you think shares in Apple Inc. Using options lets you modify your risk profile when trading to adapt to a specific market view.
For example, you can buy a call option to take a bullish view on the underlying asset while having your risk limited to the premium you initially paid.
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Although using options expands the choices traders have to express a market view, they do have a few possible disadvantages you should be aware of. Unlike an actual asset, options contracts expire at a certain time. This means you need to take a market view that also has a time frame associated with it when trading options. With stock options, when you hold a call option on a stock, you do not receive any dividends paid out to holders of the underlying stock.
Compared to simply buying or selling an underlying asset, options and the various options strategies you can use when trading them require education to understand and use them effectively.