In options trading, the strike price denotes the point at which an option may be “called” into play. When trading options, picking the proper strike price is just as crucial as picking the perfect expiration date.
A greater strike price options for a call option means that it will take a larger price change in the underlying market before the option is in the money, hence higher strike price call options are often cheaper than lower strike price call options. If an option’s price is “at the money,” it signifies that there is a 50/50 probability that the option will expire with a value, or that it will expire worthless.
Let’s take a look at some of the top risk-mitigating tactics that a beginner trader may use in option trading, including calls and puts.
Top Option Trading Strategies
Buying one call option At-The-Money (ATM) and selling the other call option Out-Of-The-Money (OTM) is a common and profitable trading strategy in a bullish market. A bull call spread describes this scenario. Note that the stock and expiry date of the calls must be identical.
This strategy results in profits when the underlying stock price increases (equal to the spread minus the net debit) and loses when the stock price falls (equivalent to the net debit).
The bull put spread is a common strategy used by option traders who have just a moderate degree of optimism on the future direction of the underlying asset. This strategy is quite similar to the bull call spread, only we are purchasing puts instead of calls. If you were to use this strategy, you would buy one out-of-the-money put option and sell one in-the-money put option.
When one is very positive on a company or index, a sure options trading method is the call ratio back spread. Traders who use this strategy have a good chance of profiting endlessly from rising markets while losing just a nominal amount from declining ones.
● Bear Call Spread
One sure options trading strategy for a negative market is the bear call spread, which consists of two separate bearish positions. It is crucial to remember that the stock underlying both calls and their respective expiration dates must be identical.
● Bear Put Spread
The Bull Call Spread and option buying strategy are quite similar, and both are easy to implement. Traders use this strategy when they are somewhat pessimistic about the market or expect it to decrease by a little amount.
The strip is an option strategy that transitions from being bearish to neutral and entails buying two ATM puts and one ATM call. These options, if acquired, must have the same strike price and expiry date.
When the underlying market rises in value, the price of a call option rises, and when it falls in value, the price of a put option rises. This is because in either case the option will be getting closer to the strike price, which means that there is a greater chance that it will expire in the money.