Do option strategies offer advantage of power and flexibility?
Team Veye | 25-Nov-2019
Earlier, we had given an introduction to options. The risks in trading options were also outlined. We had discussed the factors involved in option pricing. Now we shall elaborate upon the option strategies commonly used in the market and how to benefit from these.
Different Option strategies are used in making a profit in the Bull, Bear & Neutral market. Options strategy can be selected after looking into the details of the selected one, like entry price, breakeven point, maximum risk, and maximum profit potential.
While the simplest one is just buying a call or put option, depending upon the perception of the buyer being bullish or bearish, it can be structured into a covered call or married put strategy. A covered call is a very popular strategy because it generates income and reduces some risk of being long stock alone. In a married put strategy, investor purchases shares of stock, and simultaneously purchases put options for an equivalent number of shares. This strategy works like insurance and protects the downside risk.
Although most strategies use hedging techniques to lower the risk element, many strategies are used to reduce the net premium spent. Like in a bull call spread strategy; an investor will simultaneously buy calls at a specific strike price and sells the same number of calls at a higher strike price, both having the same expiry. In the bear put strategy, the investor will simultaneously purchase put options at a specific strike price and sell the same number of puts at a lower strike price. This strategy is used when the trader has a bearish outlook.
A long straddle strategy is used when the investor believes the price of the underlying asset will move significantly out of a range but is unsure of which direction the move will take. In this, the investor simultaneously purchases a call and put option on the same stock, with the same strike price and expiration date. This strategy allows the investor to have the opportunity for theoretically unlimited gains, while the maximum loss is limited only to the cost of both options contracts combined.
The different options strategies can be used to limit the risk and increasing the opportunity for better gains while reducing the net premium spent. With a little effort, traders can take advantage of the flexibility and power options offer.
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