Actual options trading strategies. Part II

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In this article you will learn:
Working options trading strategies in 2023;
Insights on the strategies that are in the article;

Butterfly strategy

At its core, this strategy involves the use of three different option strike prices for the same underlying instrument and with the same expiration date. This strategy combines both long and short call and put options to create a profit zone. The profit zone is ensured by the price being in a certain range. Typically, the historical volatility of the asset, which correlates with the current price level, is used to determine this range.

Important tips for those who use the butterfly strategy

It is critical to select the correct strike price for all three options. Strikes should be selected so that they are close to the current price of the underlying instrument. In this case, you need to take into account your forecasts regarding price movements.  

Second tip: The butterfly is used mainly by experienced traders, so you must clearly understand both the essence of the strategy and know when it can be used, and when it is almost 100% likely to be a mistake. When assessing, consider market trends as well as fundamental factors such as annual reports, etc.

Strangle Strategy

This strategy is similar to the straddle strategy, but uses put and call options with different expiration dates. This strategy is used in situations where the investor expects a strong price change, but cannot understand the future direction of the price change.

Keep in mind that Strangles can be expensive due to the purchase or sale of two options, and time decay (theta) can reduce their value. Additionally, the underlying instrument must move significantly to overcome the cost of the options. Short strangles imply unlimited losses in the long term, so they should be used with caution.

To successfully use this strategy, consider what in the strategy limits your limits on the premiums you pay for call and put options. This means you only risk losing what you paid for the options.

Ratio Spread Strategy

Ration Spread, also known as “Ratio Spread,” involves buying or selling more options than is required to compensate for the option delta. This strategy can provide a combination of potential profit and reduced risk.

Before using this strategy, we recommend that you consider how the time to expiration of options and the level of volatility may affect your downside. Typically, Ratio Spread can provide high volatility to maximize profits. Also, if you have questions or suggestions, do not hesitate to contact consultants or experienced traders for advice and recommendations.

Iron butterfly strategy

The Iron Butterfly is an options trading technique used when an investor expects a very small change in the price of the underlying instrument. This is a neutral strategy that combines aspects of the short straddle and the long strangle. The goal of the Iron Butterfly is to generate income while limiting potential losses within a certain price range. Here are the key differences between this strategy and the others:

Bull call spread strategy

A strategy that involves buying a call option with a lower strike price and immediately selling a call option with a higher strike price. It is used when you are generally bullish on the underlying asset.

Before implementing a bull call spread, make sure you clearly understand how it works. You should know that this is a limited risk, limited reward strategy. It is also important to say that you need to choose your strike prices carefully.

Bear Put Spread Strategy

A bear put spread is an options strategy used by investors who have a moderate expectation of a bear market and have a strong opinion regarding the value of the underlying instrument. This strategy involves buying one put option and immediately selling another put option with a lower strike price, both with the same expiration date. Here are some tips and tricks for effectively using a bear put spread

As a conclusion, we would like to remind you that all the strategies described above require competence and do not forgive mistakes. When planning trades, do not forget to take into account the price of the “Strikes” and do not confuse the execution deadlines or other variables, especially when using strategies such as “Butterfly” and others. At the same time, these strategies allow you to protect yourself from risks and at the same time make good money - a luxury that other categories of financial instruments do not provide.

Link to the first part

Jonathan Rowe

Jonathan Rowe

The creator and main author of the site is Jonathan Rowe. Trader and investor with many years of experience. A graduate of the Massachusetts Institute of Technology with over a decade of experience developing applications for financial and investment institutions.

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