As options allow investors to control more stock, futures, commodities and currencies with less risk and investment of capital, enthusiastic investors have more opportunities to make money with reduced risks. Deciding to invest in this lucrative market is easy; picking the most rewarding option trading strategies is much harder. No matter what type of analysis is used to forecast future market movements, the three most commonly used tactics are straddle, strangle and butterfly. Although selling an option is rarely used, it is a lucrative way to free up cash for more promising ventures.
The Straddle
Since the option market started in 1973, over 3 billion contracts are traded annually. Most of these expire without being exercised. When traders expect the market to move in a certain direction by a certain time, they purchase the right to buy or sell the stock at an offered price by a certain date. The straddle gives them the right to either buy or sell the stock at a certain price like six dollars a share. If the market moves as predicted, the investor will exercise the most profitable option letting the other expire.
The Strangle
The strangle works the same way in option trading strategies except at different price levels. An investor may believe that ABC Pharmaceutical Stock will gain value because of FDA approval. To protect the investment, the investor may be willing to sell ABC stock at five dollars a share in case the approval is denied and willing to buy at twelve dollars a share.
The Butterfly
The butterfly is an interesting strategy as it involves three strike prices. Investors buy or sell in the money and out of the money as they determine the lowest price, a mid-price and the highest priced opportunity. This option has very limited risk with less potential than the others have.
Selling the Option
Selling options is one of the seldom-used option trading strategies. Until the expiration time, most options have some value. Losing options have little value and few buyers; however, some money is better than no money. Selling possibly winning selections allows investors to make adjustments to current market conditions and newly found opportunities.
Understanding options isn’t terribly difficult, and by investigating various option trading strategies, investors find programs that work for them. Using the straddle, strangle, butterfly and option selling at different times provides money management techniques allowing people to quickly adjust to changing market conditions. Having this ability to buy or sell winning stocks, currency, commodities or futures contracts with a small risk makes financial sense in today’s volatile economic climate.