developing option trading strategies

developing option trading strategies

Investor in the financial market has a choice of investing in options trading that grant the buyer the right to buy but not the obligation to buy and sell the investment instrument at a particular date or price. Most people invest in option instrument since it allows them to create a unique strategy to take advantages of multiple characteristics of the market. Options trading involves significant risk and not useful for all investor. This paper review various video on developing option trading strategies.

Custom Naked Put

Most investor use custom naked put strategies to sell their put option when they do not have short term position in the current stock. The idea in mind of the most investor is to sell the put option first sell it when there is a good return in the market and then repurchase it later at a lower price. The strategies utilize three steps to ensure you earn a high profit and avoid the unlimited risk involved (Option Alpha, 2015). First is to sell the put option during the out of the many calls. The second step is to buy out of the money call at a higher strike. Lastly is sell the option at naked out the money put. The total return depends on the strategy used to strike full and the credit use but to maximize the return, the stock price must hit above the naked put and below the call spread (Option Alpha, 2015). It depends on the time passage and implied volatility of the current market situation. An investor focuses on the break-even point of the market to minimize the risk that is achieved by taking out of the money put strike minus the overall net credit received.

Long call vs long call spread

Long call strategy used to buy a call option when an investor in options trading belief the price of the underlying stock will increase beyond the strike price before the option expires. For example, if the stock price of the Facebook share is $50, and you anticipate the piece will go up within the next month to around $70 or more. You can buy the call option at the strike price of $50 with a cost of $4 and when the stock price increase to more than $54, you can sell the option at a profit and earn $100 for every dollar the stock prices goes above $54. It has limited risk and unlimited return potential. Long call spread gives the investor the right to buy the option at a specific strike price and an obligation to sell the same option at a special price. It has limited risk potential and limited profit potential (projectoption, 2017). The investor buys the long call spread when the need to reduce the loss potential and risk of the option expiring.

An investor buys the long call spread because the premium call collected from selling a call against the long call reduces the net premium paid. The lower premium paid also minimizes the break-even prices hence more attractive to investor (projectoption, 2017). The long call is more aggressive directionally and exposed to high risk. This is because there are highly exposed to time expiration than long call spread. It increases with increase in the implied volatility of the market while long call spread tends to with the decrease of the stock price.

Short Call

Short call strategy focuses on prices that are out of the money on the stock price. When the stock price goes up the call gain values while the implied volatility decreases in the market, providing a strategy for seller. When the stock goes down the call loss, its rise values and implied volatility increase give a good move for buyers to sell their call option. Some of the vital things to know when applying the short call strategy include the break-even point that is calculated by adding a short strike and credit received (tastytrade, 2017). Secondly, the implied volatility of the market situation where the higher the implied volatility, the better to earn a high return. Lastly when to close the call option to make more than fifty per cent profits when holding all the risk accountable

Benefits of Trading Naked Options

Using the naked option strategy is more advantageous compared to other strategies such as the spread. First is getting filled with appropriate information that helps an investor to concentrate on one contract that maintains its liquidity all through instead of having more than one contracts that are not liquid (Tastytrade, 2016). Secondly is capturing profits that enable the investor to earn high credit compared to a short call option. This is because of the movement of implied volatility to up and down in the future and high exposure to risk. Thirdly are management opportunities on when to make the trade due to future uncertainty of the financial market. It provides opportunities to sell a contract and repurchase it with the same strike to earn easy credit.

Call vs Put Options

Option contract mostly revolves around call and put option. A call option grants the investor the right to buy a stock while the put option gives the holder the right to sell a stock. The best strategy is to buy a call option before the strike price and sell it before the expiration period. The maximum loss is limited to the expiring date that may lose the amount paid on the call options. The benefit of call option lies on the unlimited profits if the stock price rises to infinity (Option Alpha, 2016). If all the factor of a call option remains constant, an increase in implied volatility will increase the values of the option while a decrease would mean the option remain ligiid causing more loss to the investor. The passage time has a negative value on the call option since when the time value of an option is lost all that remains is the intrinsic value of the option which has no values.

In the put option strategy, an investor buys with the expectation the price of the put option will go decrease in future below the strike price and expiration period one desire (Option Alpha, 2016). The loss is limited if the trader still holds the option up to expiration date. The profitability is unlimited up to zero while implied volatility works the same as call option since there is a higher swing of profitability. Time passage has a negative impact on the option due to the loss of time values for money.

In conclusion, investment in options strategy is riskier as it requires an investor to understand and use various strategy to gain a return. Some of these strategies include long call and put option strategy, custom naked put strategy, and long call spread strategy that help to determine the strike price of when to sell or to buy the option contracts.

References

Option Alpha. (2015, January 21). Ultimate Guide To Trading Custom Naked Puts [Video]. Retrieved from https://www.youtube.com/watch?v=Cj7zcc46qQA&=&feature=emb_title

Option Alpha. (2016, May 5). Call vs Put Options Basics [Video]. Retrieved from https://www.youtube.com/watch?v=uQLMSU2NNlk&=&feature=emb_title

projectoption. (2017, November 17). Long Call vs. Call Spread | Options Strategy Comparison [Video]. Retrieved from https://www.youtube.com/watch?v=E7sKQ4cif5Y&=&feature=emb_title

Tastytrade. (2016, April 13). 3 Benefits of Trading Naked Options | Options Trading Concepts [Video]. Retrieved from https://www.youtube.com/watch?v=tv0HVko4s3k&=&feature=emb_title

tastytrade. (2017, September 19). Trade Checklist: Short Naked Call | Options Trading Concepts [Video]. Retrieved from https://www.youtube.com/watch?v=mMh7h8UiFso&=&feature=emb_title