The derivative market can be quite tricky to understand and navigate, especially for beginners. To help interested traders get a better grip of options trading, there are many options trading strategies that are available. In recent times, strategy builder tools have also cropped up online, making it easier for options traders to build and execute strategies.
But if you’re interested in options trading, it’s important to know which strategies you can employ. Here are the details of some common options trading strategies.
Covered call
The covered call is an options trading strategy that you can use in neutral markets or moderately bullish markets. Here’s how it works.
- Say you own the stock of a company in the spot market.
- You hedge this position by selling a call option of that stock.
- The strike price of the call option should be higher than the price at which you purchased the stock.
Covered put
Like the covered call, the covered put is another easy options trading strategy for beginners to derivative trading. Let’s look at the details of this strategy.
- Say you believe the outlook on a stock is negative, and that its price is likely to decline in the future.
- So, you take a short position on the stock in the spot market.
- To hedge this, you sell a put option of that stock.
- The strike price of the put option should be lower than the price at which you shorted the stock.
Protective put
A protective put strategy safeguards your trades against unexpected movements in the market. Take a look at the key details of a protective put strategy.
- Assume you’ve purchased the stock of a company in a bullish market.
- While you do expect a rise in prices, you also want to protect yourself from the potential losses that unexpected movements may bring.
- So, you buy a put option of that stock in a bid to limit your losses if the market takes a bearish turn.
Iron condor
Unlike the protective and the covered options trading strategies, which made use of either put or call options, the iron condor is an options trading strategy that involves the use of both types of options. Here’s how you construct an iron condor strategy.
- You sell an out-of-the-money put.
- You sell an out-of-the-money call.
- You buy a further out-of-the-money put.
- You then buy a further out-of-the-money call.
This is a complex strategy that comes with four legs of trading. Here’s where you can make use of tools like our options strategy builder online and get better at executing multi-layered strategies.
Iron butterfly
The iron butterfly is also a four-legged trading strategy. These are the four options trades involved.
- You buy a put option at strike price X.
- You sell a put option at strike price Y.
- You sell a call option at strike price Y.
- You buy a call option at strike price Z.
Here, the prices are in increasing order, with X < Y < Z. Again, you’ll find that executing a complex strategy like the iron butterfly is easier with an options strategy builder.
Conclusion
If you’re on the lookout for a good options strategy builder tool, we have just what you need. Out strategy builder is an innovative tool that helps you plan, build and execute multi-legged option strategies. That’s not all. It also helps you with real-time monitoring of strategies for instant action.
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