The best strategies for trading listed options

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The listed options market is complex, with many strategies to consider. However, traders can use some relatively simple strategies to trade options with low risk and reasonable returns. These include the long straddle (buying both a call and put at-the-money) or two contracts for buying or selling an iron condor. A trader could also use three different puts on three companies whose stocks he believes will rise substantially in price.

Iron Condor

An Iron condor option strategy is when put and call options are sold simultaneously on different strike prices and expiration dates. It is done with an equal number of contracts, but opposite direction, i.e. one is short, and another is a long position. There will be four contracts involved – two short and two long – with the same underlying assets but with different strike prices and maturity dates.

How to use an Iron Condor

This involves buying put and call options at the money (on the same expiry) or just outside it, then selling two puts at a lower strike price along with two calls at a higher strike price. The trader earns premiums from the short options and pays a smaller amount for the long options, offsetting the investment. The trader’s profitability will depend on whether or not the underlying asset moves outside of the strike price interval upon expiry.

Long straddle

Buying a put and call at the money is one of the best trading strategies for trading listed options because it has unlimited profit potential. Also known as buy straddle, this strategy involves purchasing both call and put contracts with the same strike price and expiration date. It does not matter whether the call option is above (in-the-money) or below (out-of-the-money) of current market price; it can still be used to create profits regardless of any movement in target stock. To implement this strategy, buy an equal number of contracts.

How to use a long straddle

A long straddle is an options trading strategy where the investor buys an at-the-money call option and an at-the-money put option with the same expiration date. The strike price of both options will be identical. A long straddle is a strategy with unlimited profit potential and limited risk.

The amount you make on a Long Straddle depends on how far the stock price goes in either direction past your short strikes. By going further out of the money, you get more leverage from the cost of the spread. When you go further OTM, it would seem to limit your return, but if it goes much further out, then there’s a good chance you’d be happy with a 50% return!

Put options

Buying multiple put options simultaneously allows the trader to profit from a substantial decrease in the target stock’s price. The trader can choose whether or not they want to take profits before a price increase, and this strategy does not require predictions as to the time frame of the drop. As a result, it is one of the best trading strategies for trading listed options known as “puts” because it involves buying put options with expiry dates at least two months away.

How to use a Put strategy

The set-up for this strategy is at least 30 days before the expiration date. The trader selects a stock he believes will make a substantial move upwards. Usually, the trader chooses a mid to large-cap company because of its volatility.

The break-even point for this strategy is equal to strike price plus the premium paid or strike price minus premium received. If you think the stock will drop below the strike price, you sell put options one strike price below where you bought them. In this case, you would have shorted puts and hope the underlying share value goes down.

Finally

New investors interested in trading listed options should use a reputable online broker from saxo bank who offer demo accounts. Practise your trading strategies before investing real money.