Options trading best strategy

Top 4 options strategies for beginners.

Options are excellent tools for both position trading and risk management, but finding the right strategy is key to using these tools to your advantage. Beginners have several options when choosing a strategy, but first you should understand what options are and how they work.

Picking the proper options strategy to use depends on your market opinion and what your goal is.

In a covered call (also called a buy-write), you hold a long position in an underlying asset and sell a call against that underlying asset. Your market opinion would be neutral to bullish on the underlying asset. On the risk vs. reward front, your maximum profit is limited and your maximum loss is substantial. If volatility increases, it has a negative effect, and if it decreases, it has a positive effect.

10 Options Strategies to Know.

10 Options Strategies To Know.

Too often, traders jump into the options game with little or no understanding of how many options strategies are available to limit their risk and maximize return. With a little bit of effort, however, traders can learn how to take advantage of the flexibility and full power of options as a trading vehicle. With this in mind, we've put together this slide show, which we hope will shorten the learning curve and point you in the right direction.

10 Options Strategies To Know.

1. Covered Call.

Aside from purchasing a naked call option, you can also engage in a basic covered call or buy-write strategy. In this strategy, you would purchase the assets outright, and simultaneously write (or sell) a call option on those same assets. Your volume of assets owned should be equivalent to the number of assets underlying the call option. Investors will often use this position when they have a short-term position and a neutral opinion on the assets, and are looking to generate additional profits (through receipt of the call premium), or protect against a potential decline in the underlying asset's value. (For more insight, read Covered Call Strategies For A Falling Market.)

2. Married Put.

In a married put strategy, an investor who purchases (or currently owns) a particular asset (such as shares), simultaneously purchases a put option for an equivalent number of shares. Investors will use this strategy when they are bullish on the asset's price and wish to protect themselves against potential short-term losses. This strategy essentially functions like an insurance policy, and establishes a floor should the asset's price plunge dramatically. (For more on using this strategy, see Married Puts: A Protective Relationship . )

3. Bull Call Spread.

In a bull call spread strategy, an investor will simultaneously buy call options at a specific strike price and sell the same number of calls at a higher strike price. Both call options will have the same expiration month and underlying asset. This type of vertical spread strategy is often used when an investor is bullish and expects a moderate rise in the price of the underlying asset. (To learn more, read Vertical Bull and Bear Credit Spreads.)

4. Bear Put Spread.

The bear put spread strategy is another form of vertical spread like the bull call spread. In this 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. Both options would be for the same underlying asset and have the same expiration date. This method is used when the trader is bearish and expects the underlying asset's price to decline. It offers both limited gains and limited losses. (For more on this strategy, read Bear Put Spreads: A Roaring Alternative To Short Selling.)

Investopedia Academy "Options for Beginners"

Now that you've learned a few different options strategies, if you're ready to take the next step and learn to:

Improve flexibility in your portfolio by adding options Approach Calls as down-payments, and Puts as insurance Interpret expiration dates, and distinguish intrinsic value from time value Calculate breakevens and risk management Explore advanced concepts such as spreads, straddles, and strangles.

5. Protective Collar.

A protective collar strategy is performed by purchasing an out-of-the-money put option and writing an out-of-the-money call option at the same time, for the same underlying asset (such as shares). This strategy is often used by investors after a long position in a stock has experienced substantial gains. In this way, investors can lock in profits without selling their shares. (For more on these types of strategies, see Don't Forget Your Protective Collar and How a Protective Collar Works.)

6. Long Straddle.

A long straddle options strategy is when an investor purchases both a call and put option with the same strike price, underlying asset and expiration date simultaneously. An investor will often use this strategy when he or she believes the price of the underlying asset will move significantly, but is unsure of which direction the move will take. This strategy allows the investor to maintain unlimited gains, while the loss is limited to the cost of both options contracts. (For more, read Straddle Strategy A Simple Approach To Market Neutral . )

7. Long Strangle.

In a long strangle options strategy, the investor purchases a call and put option with the same maturity and underlying asset, but with different strike prices. The put strike price will typically be below the strike price of the call option, and both options will be out of the money. An investor who uses this strategy believes the underlying asset's price will experience a large movement, but is unsure of which direction the move will take. Losses are limited to the costs of both options; strangles will typically be less expensive than straddles because the options are purchased out of the money. (For more, see Get A Strong Hold On Profit With Strangles.)

8. Butterfly Spread.

All the strategies up to this point have required a combination of two different positions or contracts. In a butterfly spread options strategy, an investor will combine both a bull spread strategy and a bear spread strategy, and use three different strike prices. For example, one type of butterfly spread involves purchasing one call (put) option at the lowest (highest) strike price, while selling two call (put) options at a higher (lower) strike price, and then one last call (put) option at an even higher (lower) strike price. (For more on this strategy, read Setting Profit Traps With Butterfly Spreads . )

9. Iron Condor.

An even more interesting strategy is the iron condor. In this strategy, the investor simultaneously holds a long and short position in two different strangle strategies. The iron condor is a fairly complex strategy that definitely requires time to learn, and practice to master. (We recommend reading more about this strategy in Take Flight With An Iron Condor, Should You Flock To Iron Condors? and try the strategy for yourself (risk-free!) using the Investopedia Simulator.)

10. Iron Butterfly.

The final options strategy we will demonstrate here is the iron butterfly. In this strategy, an investor will combine either a long or short straddle with the simultaneous purchase or sale of a strangle. Although similar to a butterfly spread, this strategy differs because it uses both calls and puts, as opposed to one or the other. Profit and loss are both limited within a specific range, depending on the strike prices of the options used. Investors will often use out-of-the-money options in an effort to cut costs while limiting risk. (To learn more, read What is an Iron Butterfly Option Strategy?)

Best Option Strategies.

3 Profitable Option Trades.

In the quest for the best option strategies , I have discovered that there are many ways to lose money trading options (trust me, I know what I'm talking about in that regard).

It would be helpful if we were given multiple lifetimes in which to perfect our methods of trading and investing. Unfortunately, all we have is this life and the present moment. And that means a lot of trial and error.

But trial and error doesn't mean that you must make the same mistakes as everyone else.

Or the same number.

A large part of the trial portion consists of educating yourself in order to cut down on the error portion. And the purpose of educating yourself, when it comes to option trading, is to eliminate as many potential mistakes as possible beforehand.

Option Trading Warning.

In your own quest for the best option strategies , the biggest potential mistake you want to eliminate beforehand is adopting a trading or investing philosophy that doesn't actually suit you.

For example, I know myself well enough now to realize that pure speculative trading does NOT suit my personality (although, from time to time, I'm still tempted).

That's not a slam on trading or traders. On the contrary, I have tremendous respect for those who are capable of trading either for a living or for a significant portion of their income. It absolutely can be done. But it takes the right person with the right mixture of analytical intelligence, technical training, and psychological fortitude to succeed.

If you really are drawn to a more trading-centric approach, I can confidently recommend a couple of free, high quality, and trustworthy websites that will help you immensely: online-stock-trading-guide and swing-trading-options.

The Hybrid Investor-Trader.

I suspect, however, that there are a lot of people out there like me. We may not have the pure mathematical skills to ever become great, professional, full-time traders, and even if we could be successful at it, we still lack the necessary personality to even want to be great, professional, full-time traders.

But we're not content with a simple buy and hold strategy either. It's not that we're necessarily impatient; it's just that buy and hold by itself doesn't work (although buy and hold and cheat does).

The idea of investing via mutual funds or ETFs is also unappealing. It seems wrong somehow, a waste of potential, and boring as hell. Oh, and one other thing - it doesn't work any better than straight buy and hold.

Additionally, we're not the kind of people who abdicate our investing either, who simply hand over our money and let someone else manage it for us, just spare us the details, ala Bernie Madoff.

We may not be pure traders, but we recognize that the details are still important.

The 3 Best Option Strategies for Everyday Traders/Investors.

I suppose, at heart, I'm some kind of quasi structuralist. I tend to see the structure as much as the details (the forest and the trees, if you will). Be it works of art, political campaigns, or option strategies, I'm interested in studying how intangible things are designed and why they work (or why they don't).

So I've actually thought a great deal about what the best option strategies are from a structural standpoint.

Are there effective option trading strategies that don't require professional grade expertise with technical analysis? Are there any relatively simple option strategies or methods available to increase one's returns without having to take excessive risks? If these strategies exist and if they're effective, what makes them effective?

Full disclosure - what follows are my own subjective opinions, formed out of my own personal experiences and biases:

From a structural standpoint, I can identify three separate TYPES of option strategies that can be very profitable for the everyday trader. The one common trait these methods share is that at some level, in full or in part, they rely on selling time premium:

Ultimate Options Trading Strategies.

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We are an options trading advisory service that uses diversified options trading strategies for steady and consistent gains.

You will have access to members forum with hundreds of experienced traders.

We provide a comprehensive trading plan and teach members how to make money in any market.

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Three Unique Options Strategies.

SteadyOptions.

Non-directional options trading strategies for active traders with portfolios $10,000-$100,000.

10-15 trades per month. 4-6 open trades.

Targets 5-7% monthly return on the whole account.

Anchor Trades.

Portfolio of ETFs hedged with options tailored for long term investors with portfolios $50,000+

4-5 trades per month, 3-5 ETFs + options.

Targets positive returns in all market conditions.

Steady Condors.

Hedged income trades managed by Greeks for mid term investors with portfolios $20,000+

2-3 trades per month, 2-3 open trades.

Targets 2-3% monthly return on the whole account.

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