8 Basic Options Trading Strategies for Beginners

Learn the 8 most basic options trading strategies for beginners. This article covers everything you need to know to get started, including how to choose the right strategy for your trading goals.

8 Basic Options Trading Strategies for Beginners

Too often, traders jump into the options game with little or no understanding of how many options trading 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 trading strategies for beginners 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 options trading strategies that every beginner must know. You can use these strategies to generate some monthly income with limited risk.

8 Basic Options Strategies to Know

1.Married Put or Protective Put

Married Put Options Strategies

A married put is an options trading strategy that combines the purchase of a long stock position with the purchase of a put option on the same stock. The put option gives the investor the right, but not the obligation, to sell the stock at a specified price (the strike price) on or before a specified date (the expiration date).

The married put strategy is typically used by investors who are bullish on the stock's long-term prospects but want to protect themselves against short-term losses. By purchasing the put option, the investor effectively establishes a "floor" on the stock's price. In other words, even if the stock price falls below the strike price, the investor can still sell the stock at the strike price, thereby limiting their losses.

The cost of the put option is the premium that the investor pays to the option seller. This premium is typically small relative to the cost of the stock, so the married put strategy can be a relatively inexpensive way to protect against short-term losses.

Here is an example of how the married put strategy works:

  • An investor buys 100 shares of ABC stock at ₹100 per share.
  • The investor also buys a put option on ABC stock with a strike price of ₹100 and an expiration date of one year.
  • The premium for the put option is ₹5 per share.

If the stock price falls below ₹100 in the next year, the investor can exercise the put option and sell the stock at ₹100. This will limit the investor's losses to the cost of the put option (₹5 per share).

If the stock price rises above ₹100 in the next year, the investor will keep the stock and enjoy the profits. The put option will expire worthless, and the investor will have lost only the cost of the premium.

The married put strategy is a relatively simple and straightforward way to protect against short-term losses while still participating in the potential upside of a stock. However, it is important to note that the put option will not protect the investor against losses if the stock price falls below the strike price of the put option.

Here are some of the pros and cons of the married put strategy:

Pros:

  • Relatively inexpensive way to protect against short-term losses.
  • Can be used by investors who are bullish on the stock's long-term prospects.
  • Simple and straightforward to implement.

Cons:

  • Does not protect against losses if the stock price falls below the strike price of the put option.
  • The cost of the put option can reduce the potential profits of the strategy.

Overall, the married put strategy is a versatile options trading strategy that can be used by investors of all experience levels. It is a relatively inexpensive way to protect against short-term losses while still participating in the potential upside of a stock.

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2. Bull Call Spread

Bull Call Spread Option strategies

A bull call spread is a vertical spread options trading strategy that is used to profit from a moderate rise in the price of an underlying asset. The strategy involves buying a call option with a lower strike price and selling a call option with a higher strike price, both with the same expiration date.

The net cost of a bull call spread is the difference between the premiums of the two call options. This means that the strategy is a net debit strategy, which means that the investor must put up some money upfront.

The profit potential of a bull call spread is limited to the difference between the two strike prices, minus the net debit of the strategy. However, the risk of the strategy is also limited. The maximum loss that an investor can incur is the net debit of the strategy.

The bull call spread is a delta-positive strategy, which means that the value of the strategy will increase as the price of the underlying asset increases. The strategy is also a theta-negative strategy, which means that the value of the strategy will decrease over time as the options expire.

The bull call spread is a popular options trading strategy for investors who are bullish on an underlying asset but who want to limit their risk. The strategy can be used to profit from a moderate rise in the price of the asset, while also limiting the maximum loss.

Here is an example of a bull call spread:

  • You believe that the price of ABC stock is going to rise in the next month.
  • You buy a call option with a strike price of ₹50 and an expiration date of one month.
  • You sell a call option with a strike price of ₹55 and an expiration date of one month.
  • The net debit of the strategy is ₹5.
  • If the price of ABC stock rises above ₹55, you will profit.
  • If the price of ABC stock falls below ₹50, you will lose the net debit of ₹5.

The bull call spread is a delta positive strategy, meaning that the delta of the strategy is greater than zero. The delta of an options contract is a measure of how much the price of the option will change in relation to a change in the price of the underlying asset. A delta positive strategy will profit if the price of the underlying asset rises.

The bull call spread is a theta negative strategy, meaning that the theta of the strategy is less than zero. The theta of an options contract is a measure of how much the price of the option will decrease over time. A theta negative strategy will lose money over time as the options expire.

The bull call spread is a popular options strategy for investors who are bullish on the price of an underlying asset but who want to limit their risk. The strategy can be used to profit from a moderate rise in the price of the underlying asset while also limiting the risk of a large loss.

Here are some additional advantages and disadvantages of the bull call spread strategy:

Pros:

  • Limited risk
  • Profit potential limited to the difference between the two strike prices
  • Delta positive, meaning the strategy will profit if the price of the underlying asset rises

Cons:

  • Net debit strategy, meaning the investor must pay a net premium to enter the trade
  • Theta negative, meaning the strategy will lose money over time as the options expire
  • Limited profit potential

The bull call spread is a versatile options trading strategy that can be used in a variety of situations. It is a good choice for investors who are bullish on an underlying asset but who want to limit their risk.

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3. Bear Put Spread

Bear Put Spread Option strategies

The bear put spread is a vertical spread options strategy that is used to profit from a decline in the price of an underlying asset. The strategy involves simultaneously buying a put option with a higher strike price and selling a put option with a lower strike price. Both options have the same expiration date and are on the same underlying asset.

For example, let's say that you are bearish on the stock XYZ and you believe that the price of the stock will decline from its current price of ₹50 per share to ₹45 per share or lower over the next month. You could implement a bear put spread by buying a ₹50 put option and selling a ₹45 put option. The net debit for this strategy would be the difference between the premiums of the two options, which in this case would be ₹5.

If the price of XYZ declines to ₹45 per share or lower by the expiration date of the options, you will profit from the bear put spread. Your profit will be the difference between the strike prices of the two options, minus the net debit of ₹5. In this case, your profit would be ₹5 per share.

However, if the price of XYZ does not decline to ₹45 per share or lower by the expiration date of the options, you will lose money on the bear put spread. Your maximum loss will be the net debit of ₹5.

The bear put spread is a relatively low-risk options strategy that can be used to profit from a decline in the price of an underlying asset. However, it is important to note that the maximum profit is limited, and the maximum loss is known upfront.

Here are some additional details about the bear put spread strategy:

  • The bear put spread is a net debit strategy, which means that you will have to pay a net amount to implement the strategy.
  • The delta of the bear put spread is negative, which means that the value of the strategy will increase as the price of the underlying asset decreases.
  • The theta of the bear put spread is negative, which means that the value of the strategy will decrease over time.

The bear put spread is a versatile options strategy that can be used in a variety of situations. It is a good option for investors who are bearish on the price of an underlying asset and who want to limit their risk.

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4. Long Straddle

Long Straddle Option strategies

A long straddle is an options trading strategy that involves buying both a call and a put option with the same strike price, underlying asset, and expiration date. The strike price is the price at which the option holder can buy (call) or sell (put) the underlying asset. The expiration date is the date on which the option expires and becomes worthless.

The long straddle is a neutral strategy, meaning that it does not have a directional bias. This means that the investor does not care whether the price of the underlying asset goes up or down, as long as it moves significantly. The goal of the long straddle is to profit from the volatility of the underlying asset.

The profit potential of a long straddle is unlimited, as the investor can profit from the underlying asset moving up or down. However, the loss is limited to the cost of the two options contracts, which is known as the debit.

The long straddle is a net debit strategy, which means that the investor pays money upfront when they buy the options contracts.

The long straddle is a delta-neutral strategy, which means that the investor's exposure to the underlying asset is zero. This is because the call option and the put option have opposite deltas, which cancel each other out.

The long straddle is a theta-negative strategy, which means that the value of the options contracts will decrease over time. This is because the time value of the options contracts will decay as the expiration date gets closer.

The long straddle is a vega-positive strategy, which means that the value of the options contracts will increase as the implied volatility of the underlying asset increases. This is because the options contracts will become more valuable as the market becomes more volatile.

The long straddle is a versatile strategy that can be used in a variety of situations. It can be used to profit from events such as earnings reports, product releases, and political elections. It can also be used to profit from increased volatility in the market.

However, it is important to note that the long straddle is a risky strategy. The investor could lose all of their money if the underlying asset does not move significantly. Therefore, the long straddle should only be used by experienced traders who understand the risks involved.

Here are some additional things to keep in mind about the long straddle options strategy:

  • The breakeven point for a long straddle is the strike price plus the debit.
  • The profit or loss for a long straddle is maximized when the underlying asset moves to the strike price.
  • The long straddle is a good strategy to use when you believe that the underlying asset is going to be volatile.
  • The long straddle is a risky strategy, so it should only be used by experienced traders.
  • This strategy can be used during any event or when you are expecting IV to increase.

I hope this explanation of the long straddle options strategy is helpful. Please let me know in the comment box if you have any other questions.

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5. Long Strangle

A long strangle is an options trading strategy that involves buying a call and a put option with the same underlying asset, expiration date, 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. This means that the options are currently trading below their strike prices.

The long strangle is a neutral strategy, meaning that it does not have a directional bias. This means that the investor does not care whether the price of the underlying asset goes up or down, as long as it moves significantly. The goal of the long strangle is to profit from the volatility of the underlying asset.

The profit potential of a long strangle is unlimited, as the investor can profit from the underlying asset moving up or down. However, the loss is limited to the cost of the two options contracts, which is known as the debit.

The long straddle is a net debit strategy, which means that the investor pays money upfront when they buy the options contracts

The long strangle is a delta-neutral strategy, which means that the investor's exposure to the underlying asset is zero. This is because the call option and the put option have opposite deltas, which cancel each other out.

The long strangle is a theta-negative strategy, which means that the value of the options contracts will decrease over time. This is because the time value of the options contracts will decay as the expiration date gets closer.

The long strangle is a vega-positive strategy, which means that the value of the options contracts will increase as the implied volatility of the underlying asset increases. This is because the options contracts will become more valuable as the market becomes more volatile.

The long strangle is a versatile strategy that can be used in a variety of situations. It can be used to profit from events such as earnings reports, product releases, and political elections. It can also be used to profit from increased volatility in the market.

However, it is important to note that the long strangle is a risky strategy. The investor could lose all of their money if the underlying asset does not move significantly. Therefore, the long strangle should only be used by experienced traders who understand the risks involved.

Here are some additional things to keep in mind about the long strangle options strategy:

  • The breakeven point for a long strangle is the strike price of the call option plus the debit.
  • The profit or loss for a long strangle is maximized when the underlying asset moves to the strike price of the call option or the put option.
  • The long strangle is a good strategy to use when you believe that the underlying asset is going to be volatile, but you are unsure of which direction the move will take.
  • The long strangle is a less expensive strategy than a long straddle, because the options are purchased out of the money.

I hope this explanation of the long strangle options strategy is helpful. Please let me know in the comment box if you have any other questions.

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6. Butterfly Spread

All the strategies up to this point have required a combination of two different positions or contracts.

A butterfly spread is an options trading strategy that involves buying one option at a lower strike price, selling two options at a higher strike price, and buying one option at an even higher strike price. The strike prices are typically spaced evenly apart, and the options are all of the same type, either all calls or all puts.

The butterfly spread is a neutral strategy, meaning that it does not have a directional bias. This means that the investor does not care whether the price of the underlying asset goes up or down, as long as it stays within a certain range. The goal of the butterfly spread is to profit from the time decay of the options contracts.

The profit potential of a butterfly spread is limited, but the loss is also limited. The maximum profit is the net credit received when the butterfly spread is opened. The maximum loss is the difference between the two strike prices, minus the net credit.

The butterfly spread is a net credit strategy, which means that the investor receives money upfront when they open the position. This is because the cost of the lower strike price option is typically offset by the sale of the two higher strike price options.

The butterfly spread is a delta-neutral strategy, which means that the investor's exposure to the underlying asset is zero. This is because the three options have opposite deltas, which cancel each other out.

The butterfly spread is a theta-positive strategy, which means that the value of the options contracts will increase over time. This is because the time value of the options contracts will decay as the expiration date gets closer.

The butterfly spread is a vega-negative strategy, which means that the value of the options contracts will decrease as the implied volatility of the underlying asset increases. This is because the options contracts will become less valuable as the market becomes more volatile.

The butterfly spread is a versatile strategy that can be used in a variety of situations. It can be used to profit from events such as earnings reports, product releases, and political elections. It can also be used to profit from decreased volatility in the market.

However, it is important to note that the butterfly spread is a risky strategy. The investor could lose all of their money if the underlying asset moves outside of the predetermined range. Therefore, the butterfly spread should only be used by experienced traders who understand the risks involved.

Here are some additional things to keep in mind about the butterfly spread options strategy:

  • The breakeven points for a butterfly spread are the two strike prices that are closest together.
  • The profit or loss for a butterfly spread is maximized when the underlying asset stays within the predetermined range.
  • The butterfly spread is a good strategy to use when you believe that the underlying asset will not move very much.
  • The butterfly spread is a risky strategy, so it should only be used by experienced traders.

I hope this explanation of the butterfly spread options strategy is helpful. Please let me know in the comment box if you have any other questions.

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7. Iron Condor

Iron Condor Option Strategies

An even more interesting strategy is the iron condor. The iron condor is a neutral options strategy that profits when the underlying asset stays within a specific range. It is a variation of the short strangle, but with the addition of a long option position at each end of the range. This limits the potential losses of the strategy, but also reduces the potential profits.

To create an iron condor, you would sell a put option and a call option with the same expiration date, but with different strike prices. The strike prices of the sold options should be close to the money, while the strike prices of the long options should be further out of the money.

For example, let's say you are bearish on the stock market, but you think that the volatility is likely to decrease. You could create an iron condor by selling a put option with a strike price of 100 and a call option with a strike price of 110. You would also buy a put option with a strike price of 90 and a call option with a strike price of 120.

If the stock market stays within the range of 90 to 110, you will keep the entire premium that you collected when you created the iron condor. However, if the stock market moves outside of the range, you will lose money. The maximum loss of the iron condor is the difference between the strike prices of the long options and the premium that you collected.

The iron condor is a relatively complex strategy, but it can be a profitable way to trade when you are expecting the volatility to decrease. It is important to understand the risks of the strategy before you use it, and to make sure that you are comfortable with the potential losses.

Here are some of the key features of the iron condor:

  • It is a neutral strategy, meaning that it does not have a directional bias.
  • It is a net credit strategy, meaning that you collect a premium when you create the position.
  • It is a limited risk strategy, meaning that your losses are capped.
  • It is a volatility trading strategy, meaning that it is most profitable when the volatility decreases.

Here are some of the benefits of using the iron condor:

  • It is a relatively low-risk strategy.
  • It can be used in any market environment.
  • It can be used to generate income.
  • It can be used to hedge against losses.

Here are some of the risks of using the iron condor:

  • It is a complex strategy and can be difficult to understand.
  • It is not as profitable as some other option strategies.
  • It can lose money if the underlying asset moves outside of the expected range.

Overall, the iron condor is a versatile and relatively low-risk options strategy that can be used to generate income or hedge against losses. However, it is important to understand the risks of the strategy before you use it.

I hope this helps! Let me know if you have any other questions.

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8. Iron Butterfly

Iron Butterfly - Basic Option strategies

The iron butterfly is a neutral options strategy that profits when the underlying asset stays within a specific range. It is a variation of the butterfly spread, but with the addition of a long option position at each end of the range. This limits the potential losses of the strategy, but also reduces the potential profits.

To create an iron butterfly, you would sell a put option and a call option with the same expiration date, but with different strike prices. The strike prices of the sold options should be close to the money, while the strike prices of the long options should be further out of the money.

For example, let's say you are neutral on the stock market, and you think that the volatility is likely to decrease. You could create an iron butterfly by selling a put option with a strike price of 100 and a call option with a strike price of 110. You would also buy a put option with a strike price of 95 and a call option with a strike price of 105.

If the stock market stays within the range of 95 to 105, you will keep the entire premium that you collected when you created the iron butterfly. However, if the stock market moves outside of the range, you will lose money. The maximum loss of the iron butterfly is the difference between the strike prices of the long options and the premium that you collected.

The iron butterfly is a relatively complex strategy, but it can be a profitable way to trade when you are expecting the volatility to decrease. It is important to understand the risks of the strategy before you use it, and to make sure that you are comfortable with the potential losses.

Here are some of the key features of the iron butterfly:

  • It is a neutral strategy, meaning that it does not have a directional bias.
  • It is a net credit strategy, meaning that you collect a premium when you create the position.
  • It is a limited risk strategy, meaning that your losses are capped.
  • It is a volatility trading strategy, meaning that it is most profitable when the volatility decreases.

Here are some of the benefits of using the iron butterfly:

  • It is a relatively low-risk strategy.
  • It can be used in any market environment.
  • It can be used to generate income.
  • It can be used to hedge against losses.

Here are some of the risks of using the iron butterfly:

  • It is a complex strategy and can be difficult to understand.
  • It is not as profitable as some other option strategies.
  • It can lose money if the underlying asset moves outside of the expected range.

Overall, the iron butterfly is a versatile and relatively low-risk options strategy that can be used to generate income or hedge against losses. However, it is important to understand the risks of the strategy before you use it.

In addition to the above, here are some additional details about the iron butterfly strategy:

The breakeven points of the iron butterfly are calculated as follows:

  • Lower breakeven point = strike price of short put - net premium received
  • Upper breakeven point = strike price of short call + net premium received
  • The profit of the iron butterfly is maximized when the underlying asset stays within the range of the breakeven points.
  • The maximum loss of the iron butterfly is limited to the net premium received when the underlying asset moves outside of the range of the breakeven points.

The iron butterfly is a versatile options strategy that can be used in a variety of market conditions. It is a good choice for traders who are looking for a low-risk way to generate income or hedge against losses. However, it is important to understand the risks of the strategy before you use it.

The bottom line for Basic Options Trading Strategies

These are some basic options trading 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.

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