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Two Basic Options Strategies Every Trader Should Know

Options trading opens up an entirely new world of profit (and loss) potential. Unlike stocks, options give traders the flexibility to deploy different strategies in the market and bet on the future direction of securities without being bullish or bearish.

When one buys a specific stock, they naturally want the stock to appreciate in value. Similarly, when one sells a stock, i.e. shorts a stock, that person wants the value of the stock to depreciate. 

But what if a stock goes neither up nor down? What then? This is where the beauty of options trading comes in. 

Strategy #1: The Iron Condor

The iron condor is one of the most famous options trading strategies in the entire world; it also has a pretty cool name!

Essentially, an iron condor is a bet that a stock will move minimally up, minimally down, or not at all. As time passes, iron condors will produce a profit due to theta decay, also known as time premium.

At its core, an iron condor involves selling a put option and selling a call option while simultaneously purchasing a further out-of-the-money put option of a different strike and purchasing a further out-of-the-money call option of a different strike in the same options expiration series. 

The risk for an iron condor is always limited to the difference between the put options contracts and the call options contracts minus the premium received for placing the trade. 

If a trader opens an iron condor, and nothing happens in the underlying stock, anyone who is long or short the stock will not have made any money, but the iron condor trader will have collected some nice option premium and have a decent profit when all stock holders are flat!

Strategy #2

The long put option is a timeless options trading strategy as well. Since the early 1970s, investors and traders have purchased puts on stocks, indices, and currencies to protect their long positions and hedge their bets. 

Puts can be purchased in the money or out of the money. The only key thing to know is that out-of-the-money puts are always cheaper than in-the-money puts because they have more leverage and a higher probability of expiring worthless. 

In order for long puts to be profitable, the stock for which the puts were purchased must decrease in value. Although long puts can appreciate with expansions in volatility, nothing sends the price of a put soaring like a market crash. 

Final Thoughts

Solely trading iron condors and long puts will almost certainly not turn the average trader into a millionaire overnight, but there's no doubt that traders have made many fortunes with iron condors and puts in the past. 

Knowledge is power, and in the dog eat dog world of the stock market, the more strategies and concepts that you know, the better. Just by being aware of what these two options trading strategies are will put you ahead of the masses. 

2 Comments:

Trading Goddess said...

Hi Kevin!

Wow! What an informative post! I appreciate you taking the time to help us learn and ultimately put more greenbacks in our portfolios!

I am a “visualist” and would love to see some pics or charts included as well! 😚

I’m going to share this post tomorrow during Market hours with my 70k followers on Twitter!

Thank you again for your hard work!

Nghệ Nhân Trương said...

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