Options Trading Strategies For Beginners

When it comes to options trading strategies, there are a variety of styles that you can use to try to maximize returns. In this article, we will guide you on some of the most popular options trading strategies and how they can be used successfully. You will also find a few tips on how you can implement these strategies in your own options trading plan.

Options Trading Strategies Like Chess
Options Trading Strategies Can Be Like Chess

Options trading in general has been experiencing somewhat of a retail boom in recent times as traders start to look for alternative ways to maximize returns from the stock market in particular with a variety of leveraged equities trading styles really accelerating. The trading frenzy which took hold in early 2021 brought retail options trading volumes up to record levels but this is an instrument and trading style that has been around for many years.

Throughout this long history, there have been many changes in other trading areas, but Options has remained a little more consistent. Options trading strategies can be almost endless in the number of possibilities; but not all are created equal.

Some of the more popular options trading strategies will work better than others depending on the market conditions and your own personal trading style and risk appetite. That being said, there are a few options trading strategies that have proven to be consistently more reliable over extended periods and some great additional resources out there you may also wish to consider. So without further ado, let’s get started and take a look at some of the best and most popular.

Most popular Options Trading Strategies

One of the most popular options trading strategies is known as the covered call.

1. The ‘Covered Call’ options strategy

This strategy involves buying a stock and then selling a call option against it. The options premium collected from the sale of the call option can offset any potential losses in the underlying stock, making this a relatively low-risk strategy.

Covered Call Options Trading Strategy

The covered call strategy is most effective when the stock is not expected to make large movements in the near future. If the stock does make a significant move, the options trader will still benefit from some of that move, but the gains will be limited.

2. The ‘Long Straddle’ strategy

Next up is the long straddle strategy which involves buying a call and a put option with the same strike price and expiration date. This strategy is most effective when the options trader expects the underlying stock to make a large move but is unsure of which direction it will go.

The long straddle options strategy can be profitable even if the stock only makes a small move, as long as that move is in either direction. However, this strategy does carry more risk than the covered call strategy because you are effectively buying both options.

If you are looking for an options trading strategy that has less risk than the long straddle but still offers some upside potential, then you may want to consider the short strangle strategy.

3. ‘Short Strangle’ Strategy

The short strangle is one of the options trading strategies that works best during low volatility periods. To execute the short strangle, you would be selling a put and a call option with the same strike price and expiration date.

As an options trader, you make a profit with the short strangle strategy if the underlying stock remains relatively static. However, if the stock makes a large move in either direction, you could be faced with some substantial losses.

4. The ‘Long Put’

Another popular options trading strategy is known as the long put. This strategy involves buying a put option on a stock that you believe will decrease in value. If the stock does indeed fall, you will make a profit.

The long put strategy as you might expect is most effective when the market is expected to decline. This strategy can also be used as a hedge against a portfolio of stocks that you own to protect yourself from potential losses.

5. ‘Put-Call Parity’ Trade

Another options trading strategy that is often used by traders is known as the put-call parity trade.

This strategy takes advantage of the fact that options on stocks and index futures are priced similarly. By simultaneously buying a put option and selling a call option with the same strike price and expiration date, you can lock in a small profit regardless of which direction the market moves.

The put-call parity trade is most effective when the market is relatively stable and not expected to make large movements in either direction. This strategy can also be used to hedge a portfolio of stocks or index futures.

6. ‘Iron Condor’ Strategy

The final options trading strategy we will cover today is known as the iron condor strategy.

This strategy is a bit more complex but can be very lucrative if executed correctly. It involves selling a put option and a call option with different strike prices and collecting the premium from both options.

The key to this strategy is to make sure that the options expire worthless, which will result in a profit for on both options contracts.

To execute the iron condor strategy successfully, you must have a good understanding of options pricing and the factors that affect it. As with quite a few of the options trading strategies covered, the Iron Condor is also most effective when the market is not expected to make large movements in either direction.

Options Trading Strategies In Summary

So there you have it! A short list of some of the best and most popular options trading strategies that you can use to try and generate profits during varying market conditions.

Options trading is a topic that takes considerable time to perfect so do not expect to be an expert right off the bat. You may need to try a few different options trading strategies until you find what suits you best but this is not a bad thing. If you need more of an introduction to options trading terms before moving on with actually testing strategies, take your time to fully digest and do not rush in.

Please remember that each of the strategies included has its’ own particular optimal trading conditions, and that not all will be suitable for your own style. Always be sure to do your own research and back-testing on a paper trading account before implementing any of these strategies in your live trading plan.