Listed options trading is a highly profitable investment opportunity, and experienced traders understand that the key to success lies in knowing the right strategies. A listed option is a contract between a buyer and seller. The buyer of the option has the authority but not the duty to buy or sell an asset at a specified price within a given period, and the seller has the responsibility to fulfil their end of the contract. For seasoned traders, understanding which techniques work best for this type of investing and putting those into practice can lead to great rewards. This article will explore proven strategies used by successful listed options traders.
Hedging is a common strategy among listed options traders, and it is the practice of reducing risk by entering into an offsetting position in a related asset. For example, if you are long on shares of ABC, you may hedge your position by buying options on shares of ABC. It limits your losses should the stock price fall, as the profits from the puts will offset any losses incurred from owning the stock. By hedging their positions, investors can limit risk without sacrificing too much potential profit.
A spread is another popular strategy experienced traders use when dealing with listed options. A spread involves purchasing an option and selling another with the same expiration date but different strike prices. The goal of a spread is to limit risk while still allowing for potential profits should the right conditions arise. For example, a bullish vertical call spread may be established by buying an out-of-the-money call option and selling an in-the-money call option simultaneously. This type of spread ensures that losses are limited should the underlying stock remain stagnant or fall while also providing investors with some upside potential if the stock rises.
Straddles are another technique that experienced listed options traders utilise. A straddle involves buying or selling an equal number of calls and puts at the same strike price and expiration date. It allows investors to profit from a significant move in either direction, as they can benefit both if the stock rises or falls significantly. However, it is essential to note that investors will incur losses should the stock remain unchanged, as they would be required to repurchase their positions at a higher cost than what they were initially paid.
A strangle is similar to a straddle but with different strike prices for the options bought and sold. Instead of using the same strike price, a strangle involves buying an out-of-the-money call and put at different strike prices. This strategy can benefit listed option traders in volatile markets. Investors can profit from significant moves in either direction without worrying about the loss incurred when repurchasing their positions should the stock remain unchanged. Traders can view Saxo Capital Markets to check volatility and live market quotes.
A butterfly spread is another technique used by seasoned listed options traders. A butterfly spread involves simultaneously purchasing one call option with a low strike price, two calls with a higher strike price and one call with an even higher strike price. This strategy aims to make money if the underlying stock remains within a specific range while limiting risk in the event of a significant move in either direction. It can benefit investors expecting the stock to remain relatively stable but still want to take advantage of potential upside should it increase in value.
The last technique we will discuss is a collar. A collar is an investment strategy used by listed options traders, which involves first selling a call option and then using the proceeds to purchase a put option with the same expiration date. It limits risk without sacrificing too much potential gain should the stock rise significantly. It also protects against any losses should the stock fall, as the profits from the puts will offset any losses incurred from owning the stock. By hedging their positions, investors can limit risk while allowing for potential gains if conditions are right.