Options are great tools for long term trading and risk management. When you utilize the right options strategy, you can limit your risks and maximize your return. Options give the stock holder the right to buy or sell the underlying asset at a specified price. As a holder, you are not obligated to buy or sell the assets when you choose an options, but you have the right to do so on or before its expiration date.
The two types of options are a call and a put. A call gives the holder the right to buy the options, and a put gives the holder the right to sell the options. The power of options can be a great advantage to your financial security, but only when you know how to choose the right options strategy. So, what options strategies will maximize your return?
Protective Collar
The protective collar strategy allows investors to lock in profits without selling their shares. A protective collar combines a put option purchased to hedge the risk on a stock and a call option to finance the put purchase. This combination forms a “collar” for the underlying stock defined by the strike prices. The protective part of this options strategy comes from the downside protection for the stock provided by the put position. The protective collar options strategy is often used by those who have long position experience in a stock that has shown substantial gains.
Long Straddle
The long straddle options strategy involves the simultaneous purchase of a call and put option with the same strike price, underlying asset, and expiration date. This strategy is often used to maintain unlimited gains and limit losses to cost of both options contracts. The long straddle options strategy is used when an investor knows an underlying asset will move but doesn’t know which direction the move will take. While there is still a limited potential for loss, this options strategy leaves an open ceiling for gain should the direction of the move be profitable.
Bull Call Spread
A bull call spread strategy is used by investors who expect the price of the underlying assets to experience a moderate rise. This options strategy involves the purchase of a call options at a specific strike price. The investor then sells the same number of puts at a lower strike price. Both the options are for the same underlying asset and have the same expiration date. This options strategy limits both gains and losses.
Covered Call
The covered call options strategy allows holders to generate additional profits and protect a decline in the underlying asset’s value. The strategy involves purchasing the assets outright while simultaneously selling a call option. This is a good strategy for those who have a short term or neutral position on the gain or loss of the assets. In a covered call options strategy, the assets that you own should be equal to the number of assets underlying the call option.
Long Strangle
The long strangle options strategy is beneficial to those who feel that the underlying asset’s price will experience a large movement, but aren’t sure which direction the movement will go. The strategy involves the purchase of a call and put action with different strike prices, but the same maturity and underlying asset. The put strike is below the strike price of the call options and both options are out-of-the-money. The long strangle options strategy limits the loss to the cost of both the options.
Options strategies allow you more control over your risks with long term trading. Your financial advisor can help you understand what options strategy is the best choice for you. When you choose the right options strategy, you will limit your losses, maximize your return, and be pleased with your increased financial gain.