The world of options strategies can be very difficult for traders new to the industry. Calls and puts are the basic building blocks of options. Calls mean you’re bullish on the stock, and puts mean you’re bearish. So, if you buy a call, you want the stock to go up, and if you buy a put, you want the stock price to fall.
Buying calls and puts forces you to be right on the money with your trade. It’s important to remember that most options expire worthless. They are decaying assets, so if you choose the wrong direction of the trade, you’ll end up with a worthless asset.
The price of your options contract will expire worthless, which is what happens to most new options traders unless they get lucky. Many new traders have beginner’s luck, but eventually, their luck runs out, which is why many people say that options are “risky.” It’s because they didn’t know how to trade them correctly.
What Are the Best Options Strategies?
- Credit spreads are best strategy for safe options trading
- Debit spreads are directional while helping to limit risk
- Iron condors are good strategies for range markets
- Naked options are most profitable but are riskiest
- Trading odds in your favor as a seller over a buyer
Credit Spreads
Credit spreads are one of the most popular and safest option strategies. When implementing this trading strategy, you become an options “seller” rather than an options buyer. Remember, options are decaying assets, and most contracts expire worthlessly.
That’s why becoming an options seller puts the trading odds more in your favor than being a buyer.
Credit spreads combine selling your “anchor strike” and buying another strike OTM for protection. This combination of selling and buying an options contract leads to a credit. Since you are an options seller, you’re collecting the premium from the buyer.
If the option expires worthless before expiration, you get to collect the full premium. We suggest closing out your position around 50% of the profit and not holding until expiration.
Credit spreads allow you the room to be wrong in choosing the direction of the trade. A stock can trade sideways, and you can still profit since you are the options seller. Time is on your side. So, you don’t need to be as heavily directional biased as you would with other options strategies.
Debit Spreads
Debit spreads are a more directional type of trade than credit spreads. It is a little less than trading naked options; however, direction is very important.
You are an options “buyer” when trading a debit spread, so you need the stock to move in the direction you want it to go. This strategy typically starts with buying a strike in the money or at the money and then selling a strike OTM.
This combination leads to a “debit” since money is leaving your account, whereas credit spreads bring money into your account since you’re the options seller.
Debit spreads do not afford the luxury of trading sideways since this is a decaying strategy. However, it gives you a bit more protection than trading a naked call or a put. Selling the additional strike helps lower the break-even and profit levels, so there’s more protection than just trading naked calls or puts.
Naked Options Strategies
Trading naked calls and puts is a very lucrative strategy. However, this is a very dangerous trade method if you’re not careful. There are advanced options strategies that will teach you how to take the basic components of options and turn them into lucrative and safer ways to trade.
Advanced options strategies allow you to trade large-cap stocks without putting out a lot of capital upfront. Believe it or not, options can be a safe trade method if you know how to bring all components together and choose the right strategy.
Trading naked options doesn’t allow you the protection or room for the trade to go against you for some time. Often, stocks trade sideways, and if you trade just calls and puts naked, you don’t have much wiggle room for the trade to form.
How Many Options Strategies Are There?
There are hundreds of options strategies but the most common are:
- Buying naked calls and puts
- Selling naked options
- Credit and debit spreads
- Iron condors and iron butterflies
- Straddles and strangles
- Calendar spreads
- Diagonal spreads
- Covered calls
Which Option Strategy Is Most Profitable?
Selling naked options is the most profitable option strategy and also the riskiest. They carry huge profit potential, and the trading odds are more in your favor as an options seller. Selling naked options carries even more risk than buying naked options. The most you can lose buying naked options is what you paid for the contract, whereas there is almost unlimited risk being a seller of naked options. That is why being a seller of spreads is a safer strategy than selling naked.
