Whether you are trading binary options or other forms, options are great vehicles for risk management and position trading, but selecting the right strategy is essential for using them most effectively. You have a number of choices of strategies beyond simply buying and selling calls and puts. Let’s take a look at four options strategies to up your trading game.
A covered call or “buy-write” is a strategy where you stay long in an underlying asset, then sell a call against it. This strategy is helpful when you are neutral to bullish on the underlying asset. In this situation, your maximum profit is somewhat limited, while your maximum loss can be large.
When the price of the underlying asset moves against you, some of your loss is offset by the short calls. This strategy is usually used to try to match returns of the overall market with lower volatility.
Bull and Bear Spreads
With this strategy, you buy the call of an underlying asset and write a call on that asset with a higher strike price and the same expiration month. This strategy is good to employ when you believe the market will rally or is more apt to rise than fall. A bear spread is where you buy a put and write a put on the underlying asset. Binary options brokers review similar strategies with their options, which usually involve similar tiered calls or puts.
A calendar spread is where you initiate a position by simultaneously entering both a long and short position on an underlying asset with different months of delivery. When shorting the front month option, you have the time decay working with you more quickly than the time decay in the option further out.
The iron condor strategy is a fairly safe method of selling options since you cannot lost on both sides of this trade. You select a predicted trading range for your underlying asset, then sell options spreads out-of-the-money around this range.
This strategy can be entered from either the long side or the short side. You are trying to exploit a range-bound underlying asset. The trade will be profitable if the underlying asset trades within the inside strikes before expiration. By employing this strategy, you are hoping for a big move in one direction or the other by the time it expires.
Dos and Don’ts
Be sure that you have a trading plan and exit strategy that is preferably written down. This keeps you disciplined and takes emotion out of your decision making process.
About the author: A recent college graduate from University of San Francisco, Anica loves dogs, the ocean, and anything outdoor-related. She was raised in a big family, so she’s used to putting things to a vote. Also, cartwheels are her specialty.