Are you looking to invest in the stock market and make serious returns? Then it’s time to consider options trading. Options are a powerful investing tool that helps traders capitalize on both rising and falling stocks. Professional traders have been utilizing these strategies for years – but what exactly does this involve?
In this article, we will break down seven favourite options trading strategies used by top-performing professionals so that you can join their ranks and potentially generate high returns. Whether you’re just getting started or already an experienced investor, there is something here for everyone. So let’s get into it.
Covered call
Professional traders favour covered call options trading strategies because of their ability to create a safe yet still profitable income stream. A covered call option involves purchasing an underlying asset and then selling call security on the same asset. By doing this, traders can lock in potential gains if the underlying asset’s value increases after it has been purchased. At the same time, if the stock stays stagnant or goes down, the trader can still obtain profitability from selling their initial call security.
Pros favour this strategy for its low-risk features as it reduces exposure to volatility and allows traders to continually generate profits with each cycle of trading. Saxo broker Saudi Arabia provides traders with an ideal platform to utilize this strategy from.
Bull call spread
The bull call spread options trading strategy is another favourite by many professionals. It involves purchasing an at-the-money call option and selling a higher strike out-of-the-money option. This goal is to limit downside risk while maximizing potential profit, as traders will still make a profit even if the underlying asset remains stagnant.
Pros favour this strategy because of its potential to generate considerable profits while reducing exposure to market volatility. Plus, traders can adjust the strike prices of both options to create a customized risk/reward profile that meets their individual needs.
Bear put spread
The bear put spread trading strategy is a favourite of professionals due to its low-risk nature. It involves the purchase of an at-the-money put option, as well as simultaneously selling another lower strike out-of-the-money option. This strategy aims to generate profits from a declining underlying asset’s price without the risk of being assigned the underlying asset.
Pros appreciate this strategy because it has the potential to generate substantial profits while limiting exposure to market volatility. Plus, the flexibility that comes with adjusting both options’ strike prices can be beneficial for creating a customized risk/reward profile that caters to individual needs.
Protective collar
Many professionals favour the protective collar trading strategy due to its ability to protect against losses resulting from an asset’s decline in value. This strategy involves the purchase of a put option on the underlying asset and simultaneously selling call security with the same expiration date.
In case of a sharp decline in the underlying asset price, the put option will protect against losses and preserve capital. However, if the underlying asset appreciates, traders can still benefit from their sale of the call security. Pros favour this low-risk strategy for its ability to provide protection against losses and potential profits in different market conditions.
Long straddle
Many professionals favour the long-straddle trading strategy due to its high potential for profits and losses. This strategy involves simultaneously purchasing a call and putting an option with the same underlying asset, expiration date, and strike price. If the stock’s price moves significantly in either direction, traders can benefit from their position.
The high risk/reward nature of this strategy is why it is favoured by pros, as they can generate profits from large price movements in either direction. Plus, the flexibility to customize strike prices and expiration dates enables traders to create a customized risk/reward profile that meets their individual needs.
Strangle
Many professionals favour options trading strategy due to its potential for significant profits in various market conditions. It involves the simultaneous purchase of an out-of-the-money call and put option with the same expiration date. If the underlying asset moves significantly in either direction, traders can benefit from their position.
Pros favour the strangle because it allows them to benefit from a rising or falling underlying asset. Additionally, the flexibility to adjust strike prices and expiration dates allows traders to create a customized risk/reward profile that meets their individual needs.
Iron condor
Many professionals favour the iron condor trading strategy due to its low-risk nature and potential for significant profits. This strategy involves the simultaneous purchase of a call option with a lower strike price and another call option with a higher strike price, as well as selling a put option with a lower strike price and another put option with a higher strike price.
The goal of the strategy is to capture profits if the underlying asset’s price moves within a predetermined range. Pros favour this strategy for its ability to generate profits without exposing traders to significant losses in case of an unexpected market move. Additionally, the flexibility to adjust strike prices and expiration dates allows traders to create a customized risk/reward profile that fits their individual needs.