Question
What are the three main strategies used by options traders?
Answer
There are three different types of strategies when it comes to options trading. The three strategy categories are Bullish, Bearish and Neutral. There are many different strategies in each category but there are three main Bullish ones that are the most commonly used. These option trading strategies are called the Long Call, the Short Put and the Long Synthetic.
The long call strategy is simply the purchase of a call option. You would use this options trading strategy when you are bullish on market direction and also bullish on market volatility. The maximum loss is limited to what the premium paid up front for the option is but the gain is unlimited depending on how the market rallies. This strategy is the simplest way to benefit if you think that the market will make an upward move and is one of the most common strategies that new investors use.
The short put is the sale of a put option. In this strategy, the loss is unlimited in case of a falling market and the gain is limited to what the premium of selling the put option is. You would use this strategy when you are bullish on the market direction and bearish on market volatility. This can be quite a risky strategy because of the unlimited losses aspect of it and should be used carefully by new options traders.
The third most common strategy in the Bullish category is the long synthetic which is when you buy one call option and sell one put option at the same strike price. This option trading strategy has unlimited loss as well as unlimited gain. You want to use this strategy when you are bullish on market direction. You can use it when you want the same payoff characteristics as if you were holding a stock or futures contract. You get it much cheaper than buying stock outright which is always favorable.
