Popular Options Trading Strategies

Our stock option trading strategies are high probability of success trades based on current market conditions.

The strategies we implement at any given time depend on company research and current market conditions. If we expect the stock to trade in one specific direction, we will put on a spread, if the markets are sideways, we would likely put on an iron condor. At times we also may complete an iron condor by putting on two separate spread trades as the market moves in our favor.

Volatility is also a significant concern when putting on a position, being that volatility is one of the factors of option pricing. High volatility means high option prices, as a seller, this can work to our benefit. However, highly volatile times can also mean great danger if the market moves quickly against us.

Credit Spread

A credit spread involves a purchase of one option and a sale of another option in the same class and expiration month but different strike prices. Investors receive a net credit for entering the position and want the spreads to narrow or expire worthless for a profit.

For example, if stock XYZ is currently trading at $100 and we sell the $120 strike price call for $3 and then we buy the $125 strike price call for $2.25 we collect a net of $.75. As long as the stock stays below $120 until expiration, the $.75 is ours to keep. Being there is a time limit on the position, with each passing day the position decays away, now we can repurchase it for significantly less or let it decay to zero.

Iron Condor

The iron condor is a favorite among many home option traders. It works by selling an out of the money call spread and a put spread in the same class together. This way, the investor can receive a larger credit, and at the same time, not decrease their buying power because they're guaranteed to win at least one side of the trade.

Iron condors are great in sideways markets, but do carry more risk as a swift move in either direction can be problematic. If the stock breaks our range an adjustment is necessary to ensure we win.

Butterfly Spread

The butterfly spread is a neutral strategy that is a combination of a bull spread and a bear spread. It is a limited profit, limited risk options strategy. There are three strike prices involved in a butterfly spread, and it can be constructed using calls or puts.

At OptionStrategiesInsider.com, we use the long call butterfly spread. We combine two short calls at a middle strike, and one long call at a lower and upper strike, creating a long call butterfly. The upper and lower strikes, called the wings, must both be equidistant from the middle strike, called the body, and all the options must have the same expiration date.

What we want is for the options to pin at the middle strike price, this way we keep the credit for the body, we lose the credit for the upper wing, and we win on the lower wing.

Covered Call (Buy-Write)

A calendar spread is a position an investor takes if they believe the stock is going to trade higher, but slowly over time. When implemented, the investor sells a short-term upside call and buys a long-term call with the same strike price.

This strategy is a way to buy a long-term call but using the sale of the short-term call to reduce the price. The idea is that the short-term call, which decays more quickly, well expire worthless, leaving the investor with the long call which retains the majority of its value. This long-term call can then be sold for a profit or held at the reduced price, thus larger gains.

When appropriately executed, gains can be substantially large.

Calendar Spread

The butterfly spread is a neutral strategy that is a combination of a bull spread and a bear spread. It is a limited profit, limited risk options strategy. There are 3 striking prices involved in a butterfly spread and it can be constructed using calls or puts.

At OptionStrategiesInsider.com we use the long call butterfly spread. We combine two short calls at a middle strike, and one long call at a lower and upper strike creating a long call butterfly. The upper and lower strikes, called the wings, must both be equidistant from the middle strike, called the body, and all the options must have the same expiration date.

What we want is for the options to pin at the middle strike prices, this way we keep the credit for the body, we lose the credit for the upper wing, and we win on the lower wing.

All Option Trading Strategies

For a complete list of the 28 most heavily used option trading strategies from all trading approaches use the button below.

The 28 Most Used Option Strategies
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