While rise and fall are the basic aspects of the investment market, the options trader must be aware of the unique approaches to handling all its phases. Doing so will help him or her limit losses and maximize gains on the Algo Trading Software.
Though options trading may sound complicated, you can resort to certain strategies that ensure increased returns and minimize risk. Using these strategies, the investors can also bet on the market's movement while hedging their position. The traders adopt different rules to make the most of the current market.
Out of the various techniques the traders employ to turn the odds in their favor when the market is going against them, here we explain some of their most potent strategies. These strategies help them in both scenarios - when the market favors them and otherwise.
These techniques help the traders record gains, irrespective of the market condition. Here are some market-neutral strategies, their benefits, and their limitations.
Though options trading may sound complicated, you can resort to certain strategies that ensure increased returns and minimize risk. Using these strategies, the investors can also bet on the market's movement while hedging their position. The traders adopt different rules to make the most of the current market.
Out of the various techniques the traders employ to turn the odds in their favor when the market is going against them, here we explain some of their most potent strategies. These strategies help them in both scenarios - when the market favors them and otherwise.
These techniques help the traders record gains, irrespective of the market condition. Here are some market-neutral strategies, their benefits, and their limitations.
Top Five Strategies for Options Traders
Here are basic market-neutral options trading strategies:
1: Strangle Strategy
This strategy needs the trader to manage calls and puts at different strike prices. A strangle is a great options trading strategy when the underlying security is exposed to price movement. In this strategy, the pattern day trader bets for a large price movement upwards or downwards. Some people confuse strangle with straddle. While a strangle strategy involves two strike prices, a straddle options trading strategy deals with both call and put options with similar strike prices and expiration dates.
There are two types of strangle strategy. One is the long strangle, and the other is the short strangle. The traders purchase calls and puts of different strikes in the long strangle. This is done in the volatile market when there are a lot of swings, and the premium remains lesser than a straddle. A call option has a higher strike price of an asset compared to its market price.
Also, the put option has a lower strike price for an asset than the market price. This trading strategy offers huge profit potential on both sides. The trader can make an enormous profit when the security moves ahead of the break-even point in any direction. A trader incurs losses in the premium paid for the two options when the security is between the market prices at expiration.
In the short strangle, traders sell calls and puts of different strikes. This is done during rangebound action with a wider range of straddles. This strategy works for investors who want to gain from the premium from the sale of both options. However, the earnings are only when the price remains between the two strike prices and the options expire.
There are two types of strangle strategy. One is the long strangle, and the other is the short strangle. The traders purchase calls and puts of different strikes in the long strangle. This is done in the volatile market when there are a lot of swings, and the premium remains lesser than a straddle. A call option has a higher strike price of an asset compared to its market price.
Also, the put option has a lower strike price for an asset than the market price. This trading strategy offers huge profit potential on both sides. The trader can make an enormous profit when the security moves ahead of the break-even point in any direction. A trader incurs losses in the premium paid for the two options when the security is between the market prices at expiration.
In the short strangle, traders sell calls and puts of different strikes. This is done during rangebound action with a wider range of straddles. This strategy works for investors who want to gain from the premium from the sale of both options. However, the earnings are only when the price remains between the two strike prices and the options expire.
2: Straddle Strategy
A straddle strategy is when the traders deal in puts and calls of the same strike price with the same expiration date on the Options Trading App. In this case, a higher premium is involved than strangle. There are two types of straddle strategy. One is the long straddle, and the other is the short straddle. In the long straddle, the traders buy calls and puts of the same strikes.
Like strangle, this strategy is also employed in a volatile market when there are many swings. The trader intends to profit from a strong move by the security after some market event. This options strategy is mostly triggered by some newsworthy happening. However, sometimes, when the market does not react strongly, the trader employing a long straddle strategy may not make enough profit.
In the short straddle, traders sell calls and puts of the same strikes at the same expiration date. This is done during narrow-range action. The trader uses this strategy to capitalize on minimal stock movement. This strategy is market-neutral and hardly has any directional bias. When there is low movement from the security, this strategy works best. The gains come from the open position and premium collected. However, there may be a risk in both directions.
Like strangle, this strategy is also employed in a volatile market when there are many swings. The trader intends to profit from a strong move by the security after some market event. This options strategy is mostly triggered by some newsworthy happening. However, sometimes, when the market does not react strongly, the trader employing a long straddle strategy may not make enough profit.
In the short straddle, traders sell calls and puts of the same strikes at the same expiration date. This is done during narrow-range action. The trader uses this strategy to capitalize on minimal stock movement. This strategy is market-neutral and hardly has any directional bias. When there is low movement from the security, this strategy works best. The gains come from the open position and premium collected. However, there may be a risk in both directions.
3: Spread Strategy
In this type of options trading strategy, the traders buy and sell different options of the same call or put with the same security. These options differ in strike price and expiry date. This type of option contract allows the traders to earn the difference or spread between the prices of two or more underlying securities. It operates like a vanilla option with an underlying price spread and not a single price. The price spread may be spot and futures prices, interest rates spread, or currencies spread.
Spread options can be written on equities, bonds, currencies, etc. Some spread options trade on large exchanges, but most are over-the-counter (OTC). Here, the underlying assets are different commodities. There are two types of spread. One is the bull spread, and the other is the bearish spread.
A bull spread or bull call spread strategy is the best for traders when they are bullish on the market and hope for a mild gain in the asset in the future. The bear spread or bear call spread options strategy is the best when the traders go bearish in the market. Using this strategy, the traders can minimize their risk when there are movements in the market, contrary to their expectations.
A bull spread or bull call spread strategy is the best for traders when they are bullish on the market and hope for a mild gain in the asset in the future. The bear spread or bear call spread options strategy is the best when the traders go bearish in the market. Using this strategy, the traders can minimize their risk when there are movements in the market, contrary to their expectations.
In a bull call spread strategy, the traders buy ITM and sell the OTM call option. So, when they think that Nifty will rise moderately, they buy the NIFTY call option at ITM and sell the NIFTY call at OTM. This allows them to earn enormously by exercising their options and suffer significant losses when they are not exercised.
4: Iron Butterfly Strategy
The trader sells, buys, calls, and puts off the same strike in this strategy. The Iron Butterfly uses different contracts with two call options and two put options to benefit from stocks or futures prices. This trade benefits the investors from a fall in implied volatility. This becomes a successful trading strategy when option prices are expected to decline in value during sideways movement or a slight upward trend.
In the iron butterfly trade, one can profit from price movement in a narrow range with low implied volatility. This trade is like a short-straddle trade with the purchase of a long call-and-pull option for hedging. Option traders use bull and bear trades with the same expiration to create "wingspreads," including condor, iron butterfly, etc. In the iron butterfly trade, the calls and puts are spread with three strike prices and the same expiration date. When the price is stable, they make a profit.
In the iron butterfly trade, one can profit from price movement in a narrow range with low implied volatility. This trade is like a short-straddle trade with the purchase of a long call-and-pull option for hedging. Option traders use bull and bear trades with the same expiration to create "wingspreads," including condor, iron butterfly, etc. In the iron butterfly trade, the calls and puts are spread with three strike prices and the same expiration date. When the price is stable, they make a profit.
5: Condor
In the condor strategy, the traders simultaneously sell and buy calls and puts of different strikes. This strategy and the iron butterfly strategy are best when the market is projected to be in a range, and the trader wants to mitigate the risk of a market going in a single direction. Many traders suggest not to use naked options that do not have proper hedging.
Also, strategies like straddle and straddle are often considered riskier, as when the market takes a unidirectional move, these strategies may lead to losses. Condor is considered the best hedging strategy in the market when the trader wants to capture the broader range with limited risk. Know more about it on the Tradingview strategy development.
Also, strategies like straddle and straddle are often considered riskier, as when the market takes a unidirectional move, these strategies may lead to losses. Condor is considered the best hedging strategy in the market when the trader wants to capture the broader range with limited risk. Know more about it on the Tradingview strategy development.
Wrapping Up
These options trading strategies have always been quite helpful for beginner and veteran traders. Now that you know about all the popular market-neutral strategies, you can use them according to the market scenario and your trading goals on the Options Strategy Builder. You can also use these strategies as a template to create your strategy and maximize your gains.