Options are very flexible and no-obligation financial instruments used to benefit from different market conditions and/or to limit trading risks and exposure option trading strategies. Options strategies are methods to achieve specific options trading goals and to better utilize different opportunities and market conditions. Unlike almost every other financial instruments options enable traders to benefit from any market conditions even yet in fast downtrends and in no price changes.
There are a number of different alternatives trading strategies available now and new ones are invented everyday. Some of them are widely popular and followed however, many others are trading secretes of some persons or groups. There are no strategies to profit from every market condition; in reality for successful implementation, many of them require some prerequisites. Options trading strategies can be simple which require normal trading platforms and include 1 or 2 contracts/traders OR could be complex which require sophisticated trading systems and involves many contracts/trades.
With regards to the nature and implementation, options trading strategies can be categorized to 3 main groups as,
1. Bullish: They’re strategies which are utilized once the underlying product price is expected to go up. In other words the successful implementation requires price increase of the underlying product. Examples include short put, long call, synthetic long stock, bull spread, etc.
2. Bearish: They’re utilized once the underlying product price is expected to decrease and successful implementation requires price decrease. Examples include long put, short call, bear spread, synthetic short stock, etc.
3. Non-Directional or Market Neutral: These strategies are utilized on expected price volatility of the underlying instrument and are not be determined by price ups and downs. Success with these is achieved when the expected price fluctuation is achieved or not-achieved. Examples include straddles, strangles, butterfly, etc. Non-directional strategies could be further divided to two as bullish-on-volatility and bearish-on-volatility.
Along with the above three main categories two other categories also exists which are event-driven and stock-combination strategies; the former expects/considers a specific event like mergers and takeovers and make an effort to make money from that and the later is complex tactics including combinations of trades or option types.
You will find no single options trading strategy that suit every trader. In fact a good choice should depend on many factors just like the underlying product, market conditions and volatility, trader experience, access to quotes and sophisticated trading systems, brokerage service trader using, trader portfolio size and risk tolerance, long-term or short-term trading goals, and money management. Although, many of today’s trading systems are pre-loaded to aid many popular strategies it is an excellent idea to master as much strategies as you are able to and to make them easy to get at to you. The typical recommendation is that to implement simple one if you are a beginner and switch to more complex ones as you can know more about different alternatives, the marketplace and its movements.