The 5 Main Option Strategies
These are the five main option strategies you should know about when it comes to trading. If you know and understand these, it will allow you to become flexible. You can get into more in-depth information as you evolve.
Cover Call Option Strategy
Usually this is employed or used when you have some stock in a long position. However, for the short term, you believe it won’t move that fast. You can sell some option premiums, allowing you to collect premium and still hold your stock. If the stock continues to move higher, it’s possible you might lose your stock. If the stock stands still, you’ll collect premiums and still have the stock. This is the option strategy most start with.
Bullish or Bearish Vertical Spread
This is a directional play in the stock. Higher if Bullish and lower if Bearish. This allows you to buy and sell a call at different price ranges and capitalize on the stock as it moves further. Basically, you’re looking for directional play in the stock using less capital and premium in terms of profiting from the movement. The downside risk is, if stock doesn’t move in a certain time period, you’ll lose your premium or capital you used to invest in the vertical spread.
This is very flexible and looks like a butterfly. You are selling two option contracts in the middle of the spread and two protective contracts on the other side. Buying the ones on the end for protective reasons, and if the stock doesn’t move, you’re collecting the option premium as the stock prices shift. You can put a directional based butterfly if you are looking for movement.This option strategy is very good in terms of fast premium collective strategy in terms of the two contracts in the center.
You are trying to capitalize from option deterioration. Similar to a butterfly, but different because the calendar is usually offset in terms of buying and selling options in separate months. As options deteriorate, they do the most toward the last 30 days before the contract is worthless. Selling an option contract in the front month, and buying one for protection later. The early month expires quicker, and the later one a bit slower. You can adjust these to more Bullish or Bearish as well.
The selling of two vertical spreads on both sides where you are looking to capitalize again from deterioration of option premium. As times moves forward, the premium deteriorates, and you collect as it expires. If prices run against you, you have to adjust the spread and shift. A few strategies can be employed.