To make money in options, you need to use different options trading strategies. This is because the financial markets can be in 1 out of 3 states at any time. They can be bullishly upwards, bearishly downwards, or neutral. Therefore, there are 3 different sets of options trading strategies.
Bullish Options Trading Strategies
The simplest way to profit from a bullish view of the markets is to buy a call option.
Another way is to sell a put option. In this way, your profits are limited to the amount you got from the sale, but potential loss is unlimited.
But if you want to brag to your friends about your knowledge of options, go ahead buy a call option and sell a put option at the same price at the same time. Upfront, you will collect money from the selling of the put option.
When the market rises to your expectation, you will also collect money from the call option just before it expires. You will make much more than simply buying of a call option.
Bearish Options Trading Strategies
You can do the reverse and
– buy a put option or
– sell a call option or
– buy a put option and sell a call option.
Up to this point, options seem to be a fanciful way of betting on the upward and downward movements of the financial markets. The real potential of options is when the markets goes sideways.
Neutral Options Trading Strategies
The most popular neutral strategy is known as the straddle.
It is the buying of a call option and buying of a put option at the same time.
When the markets go up, the call option makes money while the put option decreases in value. However, since you have already paid for both options, your loss for the put option is limited. This is a nice strategy when you think a big move in the markets is coming, but the direction is unclear.
Best used for news trading style.
Determine Trend Before Deciding On Options Trading Strategies
A bullish, bearish or neutral view of the markets is just an opinion, possibly emotionally guided and influenced by rumors or news.
You can still use technical indicators such as moving averages, RSI, or MACD, to determine the trend and confirm your opinion before placing an option trade.
To get better at the different options trading strategies, you need to open an options trading account with an options broker who specialized in options.