With the stock market getting tougher to navigate every day, it is good to know the various strategies that a trader can use to gain the maximum profit. Traders these days must understand that instead of jumping on the first opportunity that they come across, they should know about the various techniques the experts use in order to gain the maximum profit out of their trades. These strategies can help minimise risk and maximise returns. With just a little effort, traders can learn how to take advantage of the flexibility of any stock.
10 Such Strategies Every Trader Must Know
If you are worried that you might spend a long time on the stock alone, this is the perfect strategy for you. The only drawback here is that you must be willing to sell your stocks at a price lower than the strike price. All you need to do is, purchase the underlying stock and write a call option for that simultaneously. Investors use this strategy when they have a neutral opinion on where the stock might go and hold a short-term position on the stock.
Investors who are worried that they might incur a high loss on a stock usually use this strategy. This strategy makes sure that the investor receives a base price in case the stock value falls sharply. The investor, while buying the stocks, must simultaneously purchase the put option for an equivalent number of shares. The holder of the put option can sell the shares at the strike price, and the contract costs 100 shares.
Bull Call Spread
Investors buy stocks at a specific price while selling them at a higher price simultaneously in this technique. Both call options will have the same expiration date and underlying asset in this technique. This vertical strategy is used by an investor when he feels that there won’t be much increase in the price of the stock anytime soon. While the investor reduces his upside on the asset, he also reduces the net premium spent, making it an ideal situation overall.
Bear Put Spread
This strategy is used when the investor feels that the price of a stock may fall in the near future. The investor will purchase put options for a trade while selling put options at a lower rate. Both put options will have the same underlying asset and expiration date. This strategy minimises both losses as well as gains. Upside may be limited in this technique, but the premium spent is reduced as well, making it a perfect technique for bearish stocks.
This strategy is for stocks that have been held for a long time now and have been providing substantial gains. A trader just needs to purchase an out-of-the-money put option and simultaneously write an out-of-the-money call option. The drawback here is that the trader might have to sell the stocks at a higher price and might lose his chance of earning high profits in the future. This technique is a mix of the covered collar and long put.
This strategy comes into play when an investor buys the call and the put option for a trade simultaneously. They both will have the same strike price and expiration date. Investors use this strategy when they feel that the price of the stock is expected to stay in a range, but they are unsure of the direction of the move. The gain that a trader can get from this strategy does not have a cap, but the loss can be equal to the costs of both options contracts combined.
It may sound similar to the previous strategy discussed, but is different in its own ways. The investors who use this strategy are worried that there may be large fluctuations in the price of the stock, but they are confused about the direction it may go in. Investors buy the put option, call option with a different strike price, an out of the money call option and out of the money put option for the same stock, with the same expiration date. This strategy becomes favourable when the price of the stock has huge movements in any direction giving the investor ample profits.
Long Call Butterfly Spread
This strategy does not require the investor to hold two different positions over a stock. Using the call option, the investor combines both the bear spread strategy and bull spread strategy. All the options are for the same underlying asset and expiration date. Three different strike prices are also used. Here the maximum profit is made when the stock remains unchanged until the point of expiration. The loss can occur only if the stock falls at a lower strike or below.
This strategy makes the investor hold a simultaneous bull put spread and a bear call spread. The investor sells an OTM bull put spread and buys another bull put spread at a lower strike price. The investor also sells the OTM call option and buys another call option for a higher strike. All options have the same underlying asset and the expiration date. If a trader feels they may end up earning a small amount of premium, they may use this strategy.
The trader will sell an at-the-money put option and buy an out-of-the-money put option. At the same time, he will sell an at-the-money call and buy an out-of-the-money call option. All the options will have the same expiration date and same underlying asset. This technique may look like a butterfly spread, but it combines both types of options. Profit and loss both are limited within a range in this technique, and they depend on the strike prices of the options used.
Thus, the correct trading strategy can help you save thousands, if not lakhs and also help ensure you against the losses you might incur. However, it is the trader’s aptitude to know exactly what strategy suits best. Correct choices may help you go a long way in this trade, and the above techniques are just the tip of the iceberg. So, better information and learning can help protect you against other losses in the market.