Options Strategies, Option Strategy

Options strategies are plans implemented by an options trader to maximize profits and minimize risks. An option strategy involves combining options positions on an underlying asset, typically a stock.

While trading in options, an investor can either acquire the right to buy the underlying asset (call option) or sell it (put option) on or before a specific date at a predetermined price (strike price). The value of a call option varies in accordance with the value of the underlying stock, while that of the put option is inversely proportional to the value of the underlying stock.

Types of Options Strategies

An investor can employ several options strategies based on the expected price movement in the underlying stock, market sentiment and his/her risk appetite. One of the most common strategies, called straddle, is to acquire both call and put options. Through this options strategy, a trader can increase the value of his/her holdings significantly irrespective of the direction of the stock price movement. With this options strategy, an investor can lose money only if the underlying stock retains its value over a period of time or its price deviates only marginally.

Some of the other options strategies are:

Bullish Strategies: These strategies are employed when a trader expects the price of the underlying stock to move up. The extent of the price increase and the timeframe in which this might occur are assessed to optimize the trading strategy. A simple call buying strategy can be used in such cases.

Bearish Strategies: These are mirror images of bullish strategies. They are employed when the trader anticipates a downward movement in the underlying stock price. An investor can opt to acquire a simple put option to capitalize on the price trends in such cases.

Neutral Strategies: They are adopted when traders are unsure of the direction of the price movement of the underlying stock. These are also known as non-directional strategies, since profits are not dependent on the direction of the price of the underlying stock. Thus, a neutral strategy depends on the expected volatility of the stock price. Some examples of neutral strategies are guts, butterfly, strangle and risk reversal. Options, in these cases, could be either long or short, but tend to differ with varying strike prices.