The options market is an excellent place for traders to make money. As an options trader using options strategies, timing is vital to exploit the options market at the right time.
By definition, options are contracts that give the owner of the option contract rights but not obligations. Investors can use options to take either long or short positions on shares. This means that they can profit if share prices rise, remain flat or even fall. Such opportunities exist because options enable you to control vast amounts of shares without paying for them upfront. Instead, you only need to fund your options purchase once and then use it as many times as you like until it expires. This makes online options trading highly flexible and profitable for those prepared to study them and learn how to use them.
What Strategies Can You Use to Time the Options Market?
Vertical Spreads
The first strategy is the vertical spread. With this strategy, you take an equal number of long and short positions at different strike prices, providing that this spread does not cost more than £5 per leg. The benefit of this strategy is that if the market goes your way immediately, your return on investment will be signed very quickly – so it’s best suited to traders who want quick returns on their investments.
Credit Spreads
The second strategy is called credit spreads. This involves taking two opposite positions in two calls or put options with the same expiration date but different strike prices for either out-of-the-money calls or puts). When entering into these trades, an options trader can aim for a limited loss and a defined profit by using a net credit. If the credit spread is traded with the same number of options, it’s referred to as a “balanced” credit spread; if it involves different numbers of legs (e.g., one call spread versus two put spreads), then it is referred to as an “unbalanced” credit spread.
Iron Condors
The third strategy is called an iron condor. This is when you take long and short positions for both a bullish and bearish trade using out-of-the-money calls and put in equal quantities with the same expiration date – but at different strike prices to reduce costs. Many traders find this complicated when they first start trading options because there are four legs to manage instead of the usual two. However, this strategy can also provide much larger profits than other strategies.
Covered Calls
The fourth option is called the covered call. This is when you buy shares and sell call options at the same time against them – so you are covered if your stock falls in price because your short position will make up for it. Although this strategy reduces profits on your share returns, it’s seen as a very conservative way of trading options that carry little risk but still has good rewards. It provides limited gains with only small risks that are comparable to simply holding or selling shares outright.
The Straddle
The fifth strategy is known as the straddle. You simultaneously buy both put and call ‘at the money’ options with the same expiration date when using this strategy. This gives the best possible outcome if the stock moves in either direction after buying this straddle – but it’s more expensive than other strategies. However, returns are unlimited, making it very popular among traders who want to take more significant risks for greater potential rewards.
Combination Trades
The sixth option is called a combination trade. When using this strategy, you select three or four different options on different underlying assets with different expiry dates to be traded together efficiently. Using this combination of multiple positions, an investor will reduce overall risk while still retaining most of the benefits of separate trading positions. Long-term investors like this strategy’s stability and lower stress as it’s not focused on quick trades.
Strangle
The seventh option is called the strangle. This involves taking positions in both out-of-the-money calls and putting on the same underlying asset with the same expiration date but different strike prices. The benefit of this strategy is that it’s less expensive than other strategies involving long and short options – which makes it popular among beginners. However, gains can be limited compared to other strategies because you’re trading fewer contracts than usual.
