There are various trading strategies to trade options. Bullish trading strategies are applied where the buyer hopes that the price of a particular asset will rise. The buyer can buy calls, write puts or write calls at a lower rate, use bull butterfly spread and others strategies to gain profit by purchasing calls. Buying calls are advantageous in that the buyer's profit is unlimited due to continued profit increase as the price of the particular security increases. In general, bullish strategies benefit the buyer from an increase in the price of the asset and control other factors such as risk level thereof and investment needed. Disadvantages include Complexity of choosing other strategies other than buying of calls which is simple. Efforts to increase profit and lower losses are tedious in other bullish strategies and more commission needed (Shonkwiler, 2013).
In bearish strategies, a buyer is expecting the price of security to fall. One of these strategies is buying puts. They are advantageous since they are flexible and generates profit from a drop in the price of an asset and can control other trade aspects like risk exposure and capital requirement. Disadvantages include paying for any returns one gets. Deciding the best strategy is tedious. More commission is required due to many transactions ("Bearish Options Trading Strategies - Trading in a Bear Market," 2016).
Neutral trading strategies are applied where the price of the financial instrument does not move or rather rises or falls by a little amount within a period. The advantages of this are that there are more chances of getting returns if the price remains in the neutral state for long, the buyer generates profits when the price is neutral when the price of security rises or drops and also when the price fluctuation is within a certain appropriate range. One can also take advantage of time decay and also take care of exposure to risk. These strategies can be important in risk management and trade planning by calculating highest possible profit and greatest potential loss. The disadvantages include limited returns and high commission since most strategies are limited to at least two or more deals ("Neutral Options Trading Strategies - Trading a Neutral Market," 2016).
Volatile options trading strategies are applied where the buyer wants to make a profit in case the price of a security experiences dramatic price fluctuations with no possibility of predicting the price curve. The advantages of this include dual direction profit whether price rises or falls. The disadvantage of these includes losing money in case the price increase not enough to create long calls returns higher than long put deficit ("Volatile Trading Strategies for the Options Market," 2016).
Bearish Options Trading Strategies - Trading in a Bear Market. (2016). Optionstrading.org.
Retrieved 2 November 2016, from http://www.optionstrading.org/strategies/bearish-market/.Neutral Options Trading Strategies - Trading a Neutral Market. (2016). Optionstrading.org.
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November 2016, from http://www.optionstrading.org/strategies/.Shonkwiler, R. W. (2013). Option Trading Strategies. In Finance with Monte Carlo, (pp. 135-164).
Volatile Trading Strategies for the Options Market. (2016). Optionstrading.org. Retrieved 2
November 2016, from http://www.optionstrading.org/strategies/volatile-market/.
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