Option trading in the world of stock market has a lot of income potential and it is full of monetary benefits if you pick and follow the right strategy. There are many option trading strategies that an investor can pick from. Depending on the impression you have about the direction of stock price movement, you can pick an option strategy.
There are several strategies for trading options that are used mostly such as bullish, bearish and neutral strategies. If you have an impression of the stock price going either way then bullish or bearish strategies are used. If you have no clue about the stock price movement then neutral strategy is the right strategy to pick.
When you expect the underlying stock price going up then bullish strategy should be used. However with this strategy it is crucial to examine the amount that the stock price can increase and the period in which the rally will occur. This examination will help the trader to pick the best trading strategy. Some of the most common bullish option trading strategies used in the stock market are the call buying strategy, the bull put spread, bull call spread, short put strategy, the long call, the covered call, the protective put and the collar strategy. The call buying strategy is the most bullish strategy whereas the bull put spread and bull call spreads are the moderate ones. With this strategy you would make money as long as the stock price does not go down by the expiration date.
If you speculate that the underlying stock price will have a downward trend then bearish option trading strategy which is the opposite to the bullish strategy is the right one to pick. In the case of bearish strategy it is necessary to understand the level and also the time frame at which the prices of a stock will fall to pick the best trading strategy. Some of the commonly executed bearish strategies are short call, long put, short synthetic, put back spread, call bear spread, and put bear spread. The most bearish option trading strategy among all is the put buying strategy which is practiced mostly by beginners in this field. The call bear spread and the put bear spread are the moderately bearish options strategies.
When you are clueless about the movement of the underlying stock price then you should pick neutral option trading strategy which is also known as non-directional trading strategy. The potential profit depends on the volatility of the underlying stock price. Some common examples of neutral trading strategies are straddle and butterfly.
In straddle strategy you would buy or sell option derivatives. When the trader buys the derivative then it is known as a long straddle whereas when the trader sells the derivative it is known as a short straddle. Butterfly strategy is a less risky options trading strategy. This strategy includes two positions, the long butterfly position and the short butterfly position. When the future volatility is lower than the implied volatility then you would make profit in a long butterfly whereas in a short butterfly, you make a profit only when the future volatility of the underlying stock is higher than the implied volatility of the stock.
Besides these two neutral strategies, there are other commonly used strategies such as strangle, guts, risk reversal and condor.
There are many online programs and training courses that will teach you how to trade options and pick the right strategy that would fit your goals and trading style.