Mastering Options Trading: 4 Strategies for Success

Options are derivative contracts that allow you to leverage the short-term price movements in an asset. Since they’re riskier than trading in regular equity, many traders use complex strategies that are designed to increase the probability of earning profits, while simultaneously minimising the impact of losses. 

Top Options Trading Strategies You Need to Know        

If you’re intent on mastering options trading, you need to get to know more about these strategies and trading techniques. So, let’s take a closer look at some of the most successful options trading techniques that you can implement as part of your trading plan.

Long Straddle 

A long straddle is an options strategy that is usually executed when you expect the underlying asset to move significantly in either direction. It involves purchasing a call option and a put option of an asset, both of which have the same strike price and contract expiry date. 

The strategy won’t work if the asset’s price stays stable until expiry. The maximum profit from such a strategy is unlimited, whereas the maximum loss would be limited to the premium paid for both of these options.   

Long Strangle 

The long strangle is another popular options trading strategy. It involves purchasing a call option and a put option of an asset, both with the same expiration date. However, the strike prices of both of these options need to be different. Generally, out-of-the-money (OTM) options are used for this strategy. 

The goal of a long strangle is very similar to that of a long straddle. You can execute this strategy when you believe there is a huge price movement likely in the future but are unsure of the direction. This options strategy is only profitable if the asset price moves significantly. If it stays stable till expiry, however, you will lose the entire premium paid for the options. 

Iron Condor 

The iron condor is also among the many successful options trading techniques that you can use in markets with low volatility. It is slightly complicated since it involves the execution of two options strategies simultaneously - the bull put spread and the bear call spread. 

The bull put spread involves: 

• Selling an OTM put option 
• Purchasing an OTM put option with a lower strike price than the first OTM put option

Meanwhile, the bear call spread involves: 

• Selling an OTM call option 
• Purchasing an OTM call option with a higher strike price than the first OTM call option

All of the options in an iron condor need to have the same expiration date. Now, this strategy is profitable only if the asset trades in a range. If the asset price falls below the lower strike price OTM put option or rises above the higher strike price OTM call option, you will encounter a maximum loss situation.  

Iron Butterfly 

The iron butterfly involves selling an at-the-money (ATM) put option and buying an OTM put option. Simultaneously, you need to sell an ATM call option and purchase an OTM call option. As with the iron condor, all the options in the iron butterfly also need to have the same expiration date. 

The iron butterfly can be a highly profitable options trading strategy if the asset’s price stays stable (at the money) on the expiration date. However, if it rises above the OTM call option or falls below the OTM put option, you encounter a maximum loss scenario. 

Conclusion 

Mastering options trading becomes a lot easier once you start using the strategies mentioned above. That said, remember to first understand these strategies thoroughly before you deploy them in real-time market scenarios. This way, you can make any adjustments to the strategies if necessary to ensure that they fit your style of trading and your overall financial goals.