Different types of option trading strategies
In addition, we have a simple alphabetical list of all the strategies we cover on our A-Z List. These are options spreads that are used to generate profits when the price of an underlying security rises.
Because of this, you would use them if you were anticipating an upward movement in the price of a financial instrument. Please visit this page for more information, including a detailed list of strategies that fall into this category.
These are essentially the opposite of bullish strategies. They are used to profit from a downward move in the price of an underlying security, so you generally be advised to use them if you expected to see the price of a financial instrument fall.
For more details on this category, and a list of the relevant strategies, please click here. When the market is relatively neutral, meaning that there's not much price movement going on, stock traders and other investors can find it very difficult to find opportunities for generating profits.
However, there are certain strategies that options traders can use in such circumstances. For a list of these please visit this page. A volatile market is when there's a lot of price movement going, but there's no obvious way to predict which way prices are going to move. When the stock market is volatile, for example, stock prices tend to fluctuate quite dramatically, but there's no clear direction for the market as a whole.
Individual stocks can often go both up and down in a short space of time. These circumstances can make it hard for stock traders to make money and trades tend to involve quite a lot of risk. However, there are options trading strategies that can be used to generate profits when the market, or a specific financial instrument, is particularly volatile. Please visit this page for more information on using options to profit from volatility. We have also compiled a list of these strategies, which can be found here.
Strategies for Trading Options. Section Contents Quick Links. Choosing an Options Trading Strategy Bullish Strategies Bearish Strategies Strategies for Neutral Market Strategies for Volatile Market Other Options Trading Strategies We should point out that this section has been compiled to help you learn all about the various options trading strategies that can be used and how to choose the right one depending on a number of factors. Choosing an Options Trading Strategy Choosing the right strategy at the right time isn't always an easy thing to do, because of the amount of different ones you have to choose from.
Bullish Strategies These are options spreads that are used to generate profits when the price of an underlying security rises. Bearish Strategies These are essentially the opposite of bullish strategies. There are many different types of options that can be traded and these can be categorized in a number of ways.
In a very broad sense, there are two main types: Calls give the buyer the right to buy the underlying asset, while puts give the buyer the right to sell the underlying asset. Along with this clear distinction, options are also usually classified based on whether they are American style or European style.
This has nothing to do with geographical location, but rather when the contracts can be exercised. You can read more about the differences below. Options can be further categorized based on the method in which they are traded, their expiration cycle, and the underlying security they relate to.
There are also other specific types and a number of exotic options that exist. On this page we have published a comprehensive list of the most common categories along with the different types that fall into these categories. We have also provided further information on each type. Call options are contracts that give the owner the right to buy the underlying asset in the future at an agreed price.
You would buy a call if you believed that the underlying asset was likely to increase in price over a given period of time. Calls have an expiration date and, depending on the terms of the contract, the underlying asset can be bought any time prior to the expiration date or on the expiration date. For more detailed information on this type and some examples, please visit the following page — Calls.
Put options are essentially the opposite of calls. The owner of a put has the right to sell the underlying asset in the future at a pre-determined price. Therefore, you would buy a put if you were expecting the underlying asset to fall in value.
As with calls, there is an expiration date in the contact. For additional information and examples of how puts options work, please read the following page — Puts. Options contracts come with an expiration date, at which point the owner has the right to buy the underlying security if a call or sell it if a put.
With American style options, the owner of the contract also has the right to exercise at any time prior to the expiration date. This additional flexibility is an obvious advantage to the owner of an American style contract. You can find more information, and working examples, on the following page — American Style Options.
The owners of European style options contracts are not afforded the same flexibility as with American style contracts. If you own a European style contract then you have the right to buy or sell the underlying asset on which the contract is based only on the expiration date and not before.
Please read the following page for more detail on this style — European Style Options. Also known as listed options, this is the most common form of options. They can be bought and sold by anyone by using the services of a suitable broker.
They tend to be customized contracts with more complicated terms than most Exchange Traded contracts. When people use the term options they are generally referring to stock options, where the underlying asset is shares in a publically listed company.
While these are certainly very common, there are also a number of other types where the underlying security is something else. We have listed the most common of these below with a brief description. The underlying asset for these contracts is shares in a specific publically listed company. Contracts of this type grant the owner the right to buy or sell a specific currency at an agreed exchange rate.
The underlying security for this type is a specified futures contract. A futures option essentially gives the owner the right to enter into that specified futures contract. The underlying asset for a contract of this type can be either a physical commodity or a commodity futures contract. A basket contract is based on the underlying asset of a group of securities which could be made up stocks, currencies, commodities or other financial instruments. Contracts can be classified by their expiration cycle, which relates to the point to which the owner must exercise their right to buy or sell the relevant asset under the terms of the contract.
Some contracts are only available with one specific type of expiration cycle, while with some contracts you are able to choose. For most options traders, this information is far from essential, but it can help to recognize the terms. Below are some details on the different contract types based on their expiration cycle. These are based on the standardized expiration cycles that options contracts are listed under.