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.
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. Check out our swing trade room.
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.
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. Take our advanced options trading course and learn how to implement these strategies in our community.
Table of Contents
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 options strategies. You become an options “seller” rather than an options buyer when implementing this trading strategy. Remember, options are decaying assets and most contracts expire worthless.
That’s why becoming an options seller puts the trading odds more in your favor over being a buyer. We’ll teach you how to sell credit spreads in this advanced options trading course. Read More
Credit spreads are a combination of selling your “anchor strike” and then buying another strike OTM for protection. This combination of selling and buying an options contract leads to a credit. You’re collecting the premium from the buyer, since you are an options seller.
If the option expires worthless before expiration then you get to collect the full premium. We suggest closing out your position around 50% of profit and not holding until expiration.
Credit spreads allow you the room to be wrong on 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. Check out our stock picking service.
Debit Spreads
Debit spreads are a more directional type of trade than credit spreads. A little less than trading naked options, however, direction is very important.
You are an options “buyer” when you’re trading a debit spread, so you need the stock to move in the direction that 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 you the luxury of trading sideways, since this is a decaying strategy, however, it gives you a bit more protection then trading a naked call or a put. Selling the additional strike, helps to lower the break even and profit levels, so there’s a bit more protection than just trading naked calls or puts.
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 are the most profitable option strategy and also the riskiest. They carry with them 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 that 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.
