Available Option Strategies

1. Covered call strategy  

 

The investor underwrites (sells) a call option on a stock they own, in exchange for receiving a premium (payment) from the buyer of the option.

By selling the call option, the investor is obliged to sell the underlying asset at the strike price if the option is exercised by the buyer. However, the premium is for the seller to keep if the option expires out of money and become worthless.

The strategy is "covered" because the investor owns the underlying asset, which means they can deliver the asset if the option is exercised. This helps to limit the investor's risk, as they will not be exposed to unlimited potential losses from a significant price increase in the underlying asset.

This is a way to earn some passive income if you own the stock and predict that the price will not increase by a leap anytime soon.

 

Below are some examples of how to implement a covered call strategy in trading:

 

2. Vertical spread strategy

In a vertical call spread, the trader buys (sells) a call option with a lower strike price and simultaneously sells (buys) a call option with a higher strike price.

In a vertical put spread, the trader buys (sells) a put option with a higher strike price and simultaneously sells (buys) a put option with a lower strike price.

As a buyer (buys a call (put) option with lower (higher) strike price and sells a call (put) option with higher (lower) strike price), The maximum potential profit will be the difference between the strike prices,  less the cost of the trade, while the potential loss is limited to the cost of the trade

As a seller (sells a call (put) option with lower (higher) strike price and buys a call (put) option with higher (lower) strike price), the maximum potential profit will be the premium received from the trade, while the potential loss is limited to the difference between the strike prices less premium from the trade.

Vertical spreads are popular because they limit the trader's potential losses and provide a defined risk-reward ratio. They can be used in bullish, bearish, or neutral market conditions, and can be adjusted to fit the trader's risk tolerance and market outlook.

 

Types of Vertical Spread

 

3. Strangle strategy

In a strangle strategy, the call option is purchased with a higher strike price, while the put option is purchased with a lower strike price. This allows the trader to profit from a substantial price move in either direction. The potential profit is limited, but the risk is also limited, making it a popular strategy for traders who anticipate volatility but are unsure about the direction.

The main goal of a strangle strategy is to benefit from a significant price movement, regardless of whether it goes up or down. However, it's important to note that the price movement must be significant enough to cover the cost of purchasing both the call and put options, as well as any transaction costs.

 

4. Straddle strategy

By using a straddle strategy, the investor profits from the volatility or movement in the underlying asset's price, regardless of whether it goes up or down. If the price moves significantly in either direction, one of the options will become in-the-money while the other will expire out-of-the-money. The gains from the profitable option can potentially outweigh the loss from the unprofitable option, resulting in a net profit.

The key to the straddle strategy is that the price movement must be substantial enough to cover the cost of both options and generate a profit. This strategy is commonly used during periods of anticipated market volatility or when an event is expected to cause a significant impact on the stock's price, such as an earnings announcement or a major news event.