If you have started learning how to trade options, you might be confused as to how many actual strategies there are in option trading. In fact there are more than a dozens of strategies you can use in different situations.
Strategies such as debit spread and credit spread are ideal in a trending market, whereas strategies like butterfly or calendar spread are good when you have a specific view about the short term trend on a stock.
Beginners shouldn’t get overwhelmed by the number of strategies there are because you don’t need to know every strategy before you can start making serious money. In fact if you want to know the secrets of how to trade options successfully, then you shouldn’t feel the need to learn every single strategy there is on the market.
Most successful traders only focus on a handful of strategies to make them money consistently. Here we take a look at two of the most widely used option strategies:
Iron condor
Iron condor is basically a combination of two credit spread, one on the upside and the other on the down side. This strategy has proven to be very popular among many of the professional traders. The reason why it is so popular is because it usually has a high probability of winning when done right.
Sometimes a trader can go on a long winning streak without suffering a drawdown. The reason why it has such high chance of making money when one right is because it allows the underlying assets to move freely as long as it doesn’t breach the strike price of the sold option. Traders can sell a far out of the money and buy an even further out of money option on the upside in order to collect a credit. This way, as long as the stock doesn’t go pass the strike price of the sold option, then the trader can pocket the entire premium.
In addition, traders can replicate the exact same trade on the down side to collect even more premium. A lot of option friendly brokers would allow you to use the same margin requirement for both trades because technically speaking, you can only lose on one side only.
If you are looking to use this strategy but don’t know where to start, you can join some of the trading newsletters that utilize this strategy extensively. In fact, many of them solely rely on this strategy and they can bring in profit month after month.
Buying call and put option
This is the simplest strategy but many people might tell you that about 90% of the people lose money in buying options because 90% of the options contracts never get exercised. Nothing could be further from the truth. This strategy does have its own merit when done right. Some of the most spectacular winning trades are done in this manner because the transaction cost is much lower than other strategies and profit is unlimited.
However what you need to do is have a system that can identify breakouts and can consistently pick the right stock in the right trend. Some of the trading systems/newsletters have been focusing on this particular strategy and have seen tremendous success in brining home runs trade after trade. What you also need to look out for this strategy is when to take profit and when to cut your losses short. A proper system should already have these built into them, so leaving you more time to find the next winning stock.
