Options are very flexible and no-obligation financial instruments used to profit from different market conditions and/or to limit trading risks and exposure. Options strategies are methods to achieve specific options trading goals and to better utilize different opportunities and market conditions. Unlike most other financial instruments options enable traders to profit from any market conditions even in fast downtrends and in no price changes.
There are a number of different options trading strategies available now and new ones are invented everyday. Some of them are widely popular and followed but some others are trading secretes of some persons or groups. There are no strategies to profit from every market condition; in fact for successful implementation option trading, most of them require some prerequisites. Options trading strategies can be simple which require normal trading platforms and include one or two contracts/traders OR can be complex which require sophisticated trading systems and involves many contracts/trades.
Depending on the nature and implementation, options trading strategies can be categorized to 3 main groups as,
1. Bullish: These are strategies which are utilized when the underlying product price is expected to go up. In other words the successful implementation requires price increase of the underlying product. Examples include short put, long call, synthetic long stock, bull spread, etc.
2. Bearish: These are utilized when the underlying product price is expected to go down and successful implementation requires price decrease. Examples include long put, short call, bear spread, synthetic short stock, etc.
3. Non-Directional or Market Neutral: These strategies are utilized on expected price volatility of the underlying instrument and are not depend on price ups and downs. Success with these is achieved when the expected price fluctuation is achieved or not-achieved. Examples include straddles, strangles, butterfly, etc. Non-directional strategies can be further divided to two as bullish-on-volatility and bearish-on-volatility.
In addition to the above three main categories two other categories also exists which are event-driven and stock-combination strategies; the former expects/considers a specific event like mergers and takeovers and try to profit from that and the later is complex tactics that include combinations of trades or option types.
There are no single options trading strategy that suit every trader. In fact the right choice should depend on many factors like the underlying product, market conditions and volatility, trader experience, access to quotes and sophisticated trading systems, brokerage service trader using, trader portfolio size and risk tolerance, long-term or short-term trading goals, and money management. Although, many of today’s trading systems are pre-loaded to support many popular strategies it is a very good idea to learn as much strategies as possible and to make them easily accessible to you. The general recommendation is that to implement simple one when you are a beginner and switch to more complex ones as you get to know more about different options, the market and its movements.