There are different types of options within stock market trading such as naked options, debit spreads, credit spreads, iron condors, butterflies, straddles, and strangles. As a result, you’re able to make money in any market; up, down or sideways. Options trading is unique in the trading world. There are more moving parts to options than stocks. However, options allow you to make money no matter what the market is doing. Sounds great right?
What Are the Different Types of Options?
- Here are the different types of options:
- Naked calls and puts.
- Call credit spreads.
- Put credit spreads.
- Call debit spreads.
- Put debit spreads.
- Covered calls.
- Iron condors & butterflies.
- Straddles & strangles.
- Calendar spreads.
Different types of options strategies produce different results. It’s important to start with the simple options and work your way into the more difficult strategies.
What is an option? An option gives you the right but not the obligation to buy or sell a stock at a set price within a specified time frame. One options contract controls 100 shares of a stock.
In other words, you can make the premium of buying or selling 100 shares without owning 100 shares of a stock. As a result, options can be cheaper than stocks.
Basics: Types of Options
However, the moving parts in stock options mean the potential for profit and loss is much higher. You need to study what makes up an option and how it all works. That can make or break you as an options trader.
That’s why options seem overwhelming at first. However, once you get the hang of them, the different types of options allow you to make a nice profit without breaking the bank.
It’s important to learn how to trade different types of options on your own instead of following a trading service in and out of trades. You need to be in control of your stock market trading destiny.
What Are the Two Types of Options?
- What are the two types of options? All options strategies are made up of either a call, put, or combination of both. Call options mean that you are long the stock. Put options mean that you are short the security. You can either be an options buyer or an options seller.
Calls and puts are the basic types of options. In fact, they make up all types of options trading techniques.
strategies. It’s important to learn the basics before jumping into the deep end.
Since options have different moving parts, learning how calls and puts work is imperative. In fact, there are different ways to trade calls and puts by themselves.
In other words, not only can you buy them but you can sell them. Did you know that 80% of options expire worthless? As a result, selling naked options is safer than buying.
Time is a huge factor in the different types of options trading. That’s why you either need to be pretty accurate on direction, or sell to take advantage of time decay.
Calls take the bullish side of a trade. Puts take the bearish side. Puts are a great substitute for shorting. Most brokers allow options trading whereas not all brokers allow shorting.
Spreads are the types of options that make the foundation of many options strategies. They also provide better protection than naked calls and puts.
In fact, spreads limit risk. However, they limit profit as well. Although, that’s not necessarily a bad thing. Especially with the Greeks and different moving parts of an options contract.
There are vertical spreads which you’ll find in the options chain of you broker. You can decide whether you want a debit spread or a credit spread.
They have different goals. As a result, you need to go in with a goal in mind. That’ll help you decide which types of options spreads you’re looking to trade or if you want to use a spread to make a different option strategy.
Straddles and Strangles Are Types of Options
Straddles and strangles are other types of options strategies. They both allow you to make money whether the stock moves up or down significantly.
Both types of options require buying the same amount of calls and puts with the same expiration date. The difference between the two types of options is that a strangle has two different strike price whereas a straddle as the same strike prices.
This could potentially be a good earnings style of trade. You don’t know whether earnings will be good or bad. As a result, you’d trade a straddle. You’d profit whether the stock moved significantly up or down.
For example, you decided to buy stock XYZ at earnings. You decided on buying the May call and put for a strike price of $15. The call costs $3 and the put costs $2. The trade would cost you a total of $500. $3+$2=$5 and remember one contract controls 100 shares so you’d multiply that by 100 to get $500.
A straddle profits because you own both a call and a put so you’re making money on whatever direction it chooses. However, it’s important to remember that one of the contracts will lose.
As a result, in order to profit, you’d need the direction to move more than $3. While a straddle has no directional bias a strangle does. With a strangle, you believe a stock is going to move in a certain direction.
However, you buy the opposite contract to protect yourself. Straddles are cheaper and don’t need such a significant move to break even.
Iron Condors Are Types of Options
Remember how we said there are different types of options to make money in any market? Iron condors are a strategy that makes money in a neutral market.
That’s where the iron condor comes to the rescue. They’re limited risk non-directional plays. They do best when there’s low volatility.
In essence, an iron condor is a combination of spreads. For example, a bull put spread and a bear call spread.
Study and Practice
The different types of options strategies were developed for our protection. Hence the need to really put in the effort to study them. Most new traders jump right into options without understanding what makes an option tick.
We can’t stress to you enough the importance of practice trading them. That’ll be the difference between profit an loss. Open a simulated account. TD Ameritrade as a great on in ThinkorSwim.
When you learn the how to trade different types of options, you open up an entirely new way to make money without putting up a lot of capital all while protecting yourself. To get a full idea of the world of advanced options and all the different types, take our FREE options trading courses.