8 Basic Options Strategies to Know

Too often, traders jump into the options game with little or no understanding of how many options strategies are available to limit their risk and maximize return. With a little bit of effort, however, traders can learn how to take advantage of the flexibility and full power of options as a trading vehicle. We are discussing here 8 basic options strategies that can help to generate good alpha for your portfolio.

In our previous article, we have discussed how can you protect your portfolio using options. Now today we discuss some basic option strategies you can use to generate some monthly income with limited risk.

8 Basic Options Strategies to Know

1.Married Put

In a married put strategy, an investor who purchases (or currently owns) a particular asset (such as shares), simultaneously purchases a put option for an equivalent number of shares. Investors will use this strategy when they are bullish on the asset’s price and wish to protect themselves against potential short-term losses. This strategy essentially functions like an insurance policy and establishes a floor should the asset’s price plunge dramatically.

2. Bull Call Spread

In a bull call spread strategy; an investor will simultaneously buy call options at a specific strike price and sell the same number of calls at a higher strike price. Both call options will have the same expiration month and the underlying asset. This type of vertical spread strategy is often used when an investor is bullish and expects a moderate rise in the price of the underlying asset.

This strategy is a net Debit strategy with delta Positive and Theta Negative.

3. Bear Put Spread

The bear put spread strategy is another form of vertical spread like the bull call spread. In this strategy, the investor will simultaneously purchase put options at a specific strike price and sell the same number of puts at a lower strike price. Both options would be for the same underlying asset and have the same expiration date. This method is used when the trader is bearish and expects the underlying asset’s price to decline. It offers both limited gains and limited losses.

This strategy is a net Debit strategy with delta and Theta Negative.

4. Long Straddle

A long straddle options strategy is when an investor purchases both a call and put option with the same strike price, underlying asset and expiration date simultaneously. An investor will often use this strategy when he or she believes the price of the underlying asset will move significantly but is unsure of which direction the move will take. This strategy allows the investor to maintain unlimited gains, while the loss is limited to the cost of both options contracts.

This strategy is a net credit strategy with Delta neutral, Theta Negative and Vega Positive. This strategy can be used during any event or when you are expecting IV to increase.

5. Long Strangle

In a long strangle options strategy, the investor purchases a call and put option with the same maturity and underlying asset, but with different strike prices. The put strike price will typically be below the strike price of the call option, and both options will be out of the money. An investor who uses this strategy believes the underlying asset’s price will experience a large movement but is unsure of which direction the move will take. Losses are limited to the costs of both options; strangles will typically be less expensive than straddles because the options are purchased out of the money.

This strategy is a net credit strategy with Delta neutral, Theta Negative and Vega Positive. This strategy can be used during any event or when you are expecting IV to increase.

6. Butterfly Spread

All the strategies up to this point have required a combination of two different positions or contracts. In a butterfly spread options strategy, an investor will combine both a bull spread strategy and a bear spread strategy, and use three different strike prices. For example, one type of butterfly spread involves purchasing one call (put) option at the lowest (highest) strike price, while selling two call (put) options at a higher (lower) strike price, and then one last call (put) option at an even higher (lower) strike price.

This strategy is a net credit strategy with Delta neutral, Theta positive and Vega negative. This strategy can be used during any event or when you are expecting IV to decrease.

7. Iron Condor

An even more interesting strategy is the iron condor. In this strategy, the investor simultaneously holds a long and short position in two different strangle strategies. The iron condor is a fairly complex strategy that definitely requires time to learn, and practices to master. (We recommend reading more about this strategy in taking Flight with an Iron Condor)

This strategy is a net credit strategy with Delta neutral, Theta positive and Vega negative. This strategy can be used during any event or when you are expecting IV to decrease.

8. Iron Butterfly

The final options strategy we will demonstrate here is the iron butterfly. In this strategy, an investor will combine either a long or short straddle with the simultaneous purchase or sale of a strangle. Although similar to a butterfly spread, this strategy differs because it uses both calls and puts, as opposed to one or the other. Profit and loss are both limited within a specific range, depending on the strike prices of the options used. Investors will often use out-of-the-money options in an effort to cut costs while limiting risk.

This strategy is a net credit strategy with Delta neutral, Theta positive and Vega negative. This strategy can be used during any event or when you are expecting IV to decrease.

The bottom line for Basic Options Strategies

These are some basic options strategies traders are using to generate a decent income from their trading activity. Remember one thing you must understand the Greeks’ behaviour before trading with any options strategies.

Long strangle and spreads are my favourite strategies. We will discuss this more in detail in our future articles. Don’t forget to post your views and suggestions in our comment box if you like our work. You can publish your tips on any topic too on which you want our next article. Have a profitable trading friend.

Options Strategies – A Mentorship Program

On September 01, 2019, We have launched a new mentorship program for Option strategies, in which we’ll discuss how can we deploy these strategies? What rules we should follow before taking a trade? and what should be our adjustments if the script is moving against your direction/Prediction?