Option Strategies
Now that we are entirely familiar with options let us begin with the understanding of ‘Option Strategies.’
Options open up the door for creating a multitude of different strategies using various combinations of the four basic strategies. They are
- Long Call
- Short Call
- Long Put
- Short Put
Some strategies can also be devised using an underlying asset.
There are few basic things which an option trader needs to keep in mind before they get into it.
- Risk Reward profile
- Directional movement of the asset – Bullish / Bearish / Neutral
- Volatility of the underlying asset
- Objective of the Trader – Speculation or Hedging
- Timing
What are the different types of Options Strategies?
Option Strategies can be classified into 5 major categories-
1. Naked Options Strategies
2. Spread Strategies
3. Hedging Strategies
4. Volatility Strategies
5. Range bound Strategies
Naked Option Strategies
- Long Call
- Short Call
- Long Put
- Short Put
Spread Strategies
- Bull Spread
- Bear Spread
- Ratio Back spread
- Ratio Front Spread
Hedging Strategies
- Covered Call
- Protective Put
Volatility and Range bound strategies
- Collar
- Straddle
- Strangle
- Strip
- Strap
- Short Butterfly
- Long Butterfly
- Short Condor
- Long Condor
We will dive through all the above options strategies and understand them in detail in our upcoming sections of this module. But before we do that, we must remember that an option contract can be both bought and sold. So, in our next unit, let us understand the difference between option buying and option selling.
