Options are very flexible and no-obligation financial instruments used to benefit from different market conditions and/or to limit trading risks and exposure. Options strategies are methods to accomplish specific options trading goals and to better utilize different opportunities and market conditions. Unlike almost every other financial instruments options enable traders to make money from any market conditions even in fast downtrends and in no price changes.
You will find numerous different alternatives trading strategies available now and new ones are invented everyday option trading tips. Some of them are widely popular and followed however, many others are trading secretes of some persons or groups. You will find no strategies to benefit from every market condition; in fact for successful implementation, a lot of them require some prerequisites. Options trading strategies can be simple which require normal trading platforms and include one or two contracts/traders OR may be complex which require sophisticated trading systems and involves many contracts/trades.
With respect to the nature and implementation, options trading strategies can be categorized to 3 main groups as,
1. Bullish: They’re strategies which are utilized once the underlying product price is expected to go up. Put simply the successful implementation requires price increase of the underlying product. Examples include short put, long call, synthetic long stock, bull spread, etc.
2. Bearish: They’re utilized when the underlying product price is likely to decrease and successful implementation requires price decrease. Examples include long put, short call, bear spread, synthetic short stock, etc.
3. Non-Directional or Market Neutral: These strategies are utilized on expected price volatility of the underlying instrument and aren’t be determined by price ups and downs. Success with these is achieved once the expected price fluctuation is achieved or not-achieved. Examples include straddles, strangles, butterfly, etc. Non-directional strategies may be further divided to two as bullish-on-volatility and bearish-on-volatility.
As well as the above three main categories two other categories also exists which are event-driven and stock-combination strategies; the former expects/considers a specific event like mergers and takeovers and try to make money from that and the later is complex tactics including combinations of trades or option types.
You can find no single options trading strategy that suit every trader. In fact a good choice should rely on many factors such as the underlying product, market conditions and volatility, trader experience, use of quotes and sophisticated trading systems, brokerage service trader using, trader portfolio size and risk tolerance, long-term or short-term trading goals, and money management. Although, a lot of today’s trading systems are pre-loaded to support many popular strategies it is an excellent idea to learn the maximum amount of strategies as you can and to create them easy to get at to you. The typical recommendation is that to implement simple one when you are a beginner and switch to more technical ones as you get to know more about different alternatives, the marketplace and its movements.