Best options trading strategies
By Mike Welch
Best options trading strategies are the way you us options for your favorite . Here’s a list of my favorite methods. Note: this list contains strategies that are easy to learn and understand. Each is less risky than owning stock. Most involve limited risk. For investors not familiar with options lingo read our beginners options terms and intermediate options terms posts. 1. Covered call writing. Using stock you already own (or buy new shares), you sell someone else a call option that grants the buyer the right to buy your stock at a specified price. That limits profit potential. You collect a cash premium that is yours to keep, no matter what else happens. That cash reduces your cost. Thus, if the stock declines in price, you may incur a loss, but you are better off than if you simply owned the shares. Example: Buy 100 shares of IBM Sell one IBM Jan 110 call 2. Cash-secured naked put writing. Sell a put option on a stock you want to own, choosing a strike price that represents the price you are willing to pay for stock. You collect a cash premium in return for accepting an obligation to buy stock by paying the strike price. You may not buy the stock, but if you don’t, you keep the premium as a consolation prize. If you maintain enough cash in your brokerage account to buy the shares (if the put owner exercises the put), then you are considered to be ‘cash-secured.’ Example: Sell one AMZN Jul 50 put; maintain $5,000 in account 3. Collar. A collar is a covered call position, with the addition of a put. The put acts as an insurance policy and limit losses to a minimal (but adjustable) amount. Profits are also limited, but conservative investors find that it’s a good trade-off to limit profits in return for limited losses. Example: Buy 100 shares of IBM Sell one IBM Jan 110 call Buy one IBM Jan 95 put 4. Credit spread. The purchase of one call option, and the sale of another. Or the purchase of one put option, and the sale of another. Both options have the same expiration. It’s called a credit spread because the investor collects cash for the trade. Thus, the higher priced option is sold, and a less expensive, further out of the money option is bought. This strategy has a market bias (call spread is bearish and put spread is bullish) with limited profits and limited losses. Example: Buy 5 JNJ Jul 60 calls Sell 5 JNJ Jul 55 calls or Buy 5 SPY Apr 78 puts Sell 5 SPY Apr 80 puts 5. Iron condor. A position that consists of one call credit spread and one put credit spread. Again, gains and losses are limited. Example: Buy 2 SPX May 880 calls Sell 2 SPX May 860 calls and Buy 2 SPX May 740 puts Sell 2 SPX May 760 puts 6. Diagonal (or double diagonal) spread. These are spreads in which the options have different strike prices and different expiration dates. 1. The option bought expires later than the option sold 2. The option bought is further out of the money than the option sold Example: Buy 7 XOM Nov 80 calls Sell 7 XOM Oct 75 calls This is a diagonal spread Or Buy 7 XOM Nov 60 puts Sell 7 XOM Oct 65 puts This is a diagonal spread
Best options trading strategies are the way you us options for your favorite . Here’s a list of my favorite methods. Note: this list contains strategies that are easy to learn and understand. Each is less risky than owning stock. Most involve limited risk. For investors not familiar with options lingo read our beginners options terms and intermediate options terms posts. 1. Covered call writing. Using stock you already own (or buy new shares), you sell someone else a call option that grants the buyer the right to buy your stock at a specified price. That limits profit potential. You collect a cash premium that is yours to keep, no matter what else happens. That cash reduces your cost. Thus, if the stock declines in price, you may incur a loss, but you are better off than if you simply owned the shares. Example: Buy 100 shares of IBM Sell one IBM Jan 110 call 2. Cash-secured naked put writing. Sell a put option on a stock you want to own, choosing a strike price that represents the price you are willing to pay for stock. You collect a cash premium in return for accepting an obligation to buy stock by paying the strike price. You may not buy the stock, but if you don’t, you keep the premium as a consolation prize. If you maintain enough cash in your brokerage account to buy the shares (if the put owner exercises the put), then you are considered to be ‘cash-secured.’ Example: Sell one AMZN Jul 50 put; maintain $5,000 in account 3. Collar. A collar is a covered call position, with the addition of a put. The put acts as an insurance policy and limit losses to a minimal (but adjustable) amount. Profits are also limited, but conservative investors find that it’s a good trade-off to limit profits in return for limited losses. Example: Buy 100 shares of IBM Sell one IBM Jan 110 call Buy one IBM Jan 95 put 4. Credit spread. The purchase of one call option, and the sale of another. Or the purchase of one put option, and the sale of another. Both options have the same expiration. It’s called a credit spread because the investor collects cash for the trade. Thus, the higher priced option is sold, and a less expensive, further out of the money option is bought. This strategy has a market bias (call spread is bearish and put spread is bullish) with limited profits and limited losses. Example: Buy 5 JNJ Jul 60 calls Sell 5 JNJ Jul 55 calls or Buy 5 SPY Apr 78 puts Sell 5 SPY Apr 80 puts 5. Iron condor. A position that consists of one call credit spread and one put credit spread. Again, gains and losses are limited. Example: Buy 2 SPX May 880 calls Sell 2 SPX May 860 calls and Buy 2 SPX May 740 puts Sell 2 SPX May 760 puts 6. Diagonal (or double diagonal) spread. These are spreads in which the options have different strike prices and different expiration dates. 1. The option bought expires later than the option sold 2. The option bought is further out of the money than the option sold Example: Buy 7 XOM Nov 80 calls Sell 7 XOM Oct 75 calls This is a diagonal spread Or Buy 7 XOM Nov 60 puts Sell 7 XOM Oct 65 puts This is a diagonal spread
