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Options Strategies

Using options can offer some additional trading strategies that you can implement in your trading. Check out some basic options trading strategies to help you create bullish, bearish and neutral positions.

The strategies presented in this guide are not intended to provide a complete guide to every possible options trading strategy, but rather a starting point. Whether these strategies can be useful to you depends on your knowledge of the market, your risk-carrying ability and your commodity trading objectives.

Bullish Strategies

  • Long Call: Buying a call allows you to define your risk – the option’s premium (plus transactional cost) – in seeking profit from increase in prices. An increase in volatility helps your position, while time erosion hurts your position.
  • Bull Call Spread: A bull-call spread can be executed by purchasing a call option at a specific strike price while also selling the same number of calls of the same asset and expiration date, but at a higher strike. This spread is best to use when you are moderately bullish.
  • Call Ratio Backspread: A call ratio backspread is executed by selling one call and simultaneously buying two calls at a higher strike. This strategy is best to use when you are very bullish.
  • Covered Call: A covered call is a strategy in which the trader buys an asset and sells calls on the same asset in an attempt to generate extra income from the asset.
  • Protective/Married Put: This strategy involves buying a put option on an underlying asset that you already own. The position protects you from price depreciation in the underlying asset.

Bearish Strategies

  • Long Put: Buying a put allows you to define your risk – the option’s premium (plus transactional cost) – in seeking profit from decrease in prices. An increase in volatility helps your position, while time erosion hurts your position.
  • Bear Put Spread: To execute a bear put spread you sell a put and then buy a put at a higher strike.
  • Put Ration Backspread: Involves selling one put and simultaneously buying two puts at a lower strike. Increased volatility usually helps this position while time erosion usually hurts the position.

Protective and Volatility Strategies

  • Collar: Involves buying a put and selling a call with a higher strike price while owning the underlying asset. The goal of a collar is to protect profits gained in the underlying asset.
  • Short Straddle: Selling a call and selling a put at the same strike. This strategy is designed to take advantage of time decay and dropping volatility.
  • Long Straddle: Buying a call and buying a put at the same strike. The expectation here is that this market is poised for a big move. However, the trader is not sure which way it will be.
  • Long Strangle: Buying a call and buying a put at a lower strike. The thinking here is that this market will have a very big move. However, the trader is not sure which way it will be, so he decides to buy both a call and a put. The trader must get an even larger move than a long straddle to make this strategy profitable by expiration.
  • Short Strangle: Selling a call and selling a put at a lower strike. The expectation now is for a very lackluster trading month with no trend, and reduced volatility. The trader could sell a straddle, but feels more comfortable with the wider range of maximum profit of the short strangle.
  • Long Call Butterfly: Involves selling two calls, buying one call at the next lower strike and buying one call at the next higher strike, while making sure the strikes are equidistant. The trader currently has a Call Spread. He thinks this is still a good position. However, he is worried that the futures may increase dramatically on the upside, leaving him with a substantial loss. He adds a long call.


 

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