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Options trading is probably one of the most complex forms of trading at present so a potential trader is advised to first thoroughly research about the different strategies that he/she can use in this field before actually investing on it. If you are an aspiring options trader, then getting a stronger background about how the market works is extremely important.
The following strategies can also transform you into a successful and profitable options trader, especially if you are serious about doing the whole trading process online:
1. Bull Call Spread. This is often employed by options traders who think that their underlying asset’s price will moderately increase in the closely nearing term. You can actually implement this strategy by investing in at-the-money call options and at the same time writing a more superior striking for out-of-the-money call options with similar expiration month and underlying security.
Shorting out-of-the-money call options results to a significant reduction in the amount needed to establish a bullish position while also foregoing the opportunity of a trader to earn huge profits in case the price of the underlying asset rises. A trader can maximize his gains from this strategy once the price of stock goes beyond the higher strike price between two calls.
2. Index Long Call. This is probably the simplest technique that you can use, especially if you are interested in trading index options. Its implementation actually starts by buying index call options. What makes this strategy impressive is that it does not have limitations as to the index level that an option can reach at the date of its expiration. This also results to earning unlimited profits. This strategy also comes with capped risks that are usually equal to the paid price for the index call option even if it has an extremely low index at expiration date.
3. Call Backspread. This options trading strategy involves selling multiple call options and purchasing more call options with similar expiration date and underlying stock at higher strike prices. It also offers unlimited profits and produces limited risks, making it more appealing to options traders. It is often implemented in the event that you think that underlying stocks will encounter substantial upside movements at a close date.
4. Protective Put. Also known as put hedge, this technique often takes place when a security holder purchases a put as a means of protecting himself against losses caused by the significant decrease in the security’s stock price. It is frequently employed by options traders who stay bullish on the stocks that they own but are cautious of the uncertainties that tend to become visible at the closely approaching term.
Author of the Article is Zahir Shah from www.admiralmarkets.ae
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