OPTIONS
TRADING STRATEGIES
Options Trading is a
form of trading in which the buyer of the options get a right to sell or
purchase an underlying security. This is in the form of a contract in which the
price at which the security can be purchased or sold gets fixed at the time of
buying the options. The expiration date is also fixed and is present in the contract.
These options are of
two types: Call Option and Put Option.
Although it is
important to decide which type of option to go for, something that becomes even
more important after buying the options are the options strategies. The
following are some of the commonly used options trading strategies.
BULL CALL SPREAD:
This strategy is
employed in options trading when the buyer of the call option thinks that the
price of the stock has a chance of increasing in the near future. In this, the
call option buyer buys a call option at a strike value which is less than the
trading price of the stock and simultaneously sells another call option of the
same stock at a higher strike value, i.e., a value which is greater than the
current trading price of the stock.
BULL PUT SPREAD:
This strategy is also
employed when the buyer of the put option thinks that the price of the stock
has a chance of increasing in the near future. In this, the put option buyer
sells a put option which has a higher strike value, i.e., the value is greater
than the current trading price of the stock, and buys a put option with a lower
strike value, i.e., the strike value is lower than the price at which the stock
is currently trading.
BEAR CALL SPREAD:
In options trading,
the Bear Call Spread is a strategy in which the buyer of the call option buys
call options at a strike value greater than the current stock trading price,
but the call options are sold at a strike price which is lower than the stock
trading price. It is used when the buyer of the call options thinks that the
price of the stock has a chance of going down in the near future.
BEAR PUT SPREAD:
This strategy is also
employed by the options trader when there is a feeling that the price of the
stock can go down in the near future. In this, the put options are purchased at
a strike value greater than the current trading price of a stock. Also, put
options are sold at a strike value which is less than the current stock trading
price.
These are some of the
many strategies that are helpful to an options trader.
