Candlestick Trading Blog

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While there are many options strategies available to traders in today's article we discuss five. Please read the options trading strategies listed below.

Covered Calls
Covered calls mean the writer of the of the call takes on the obligation to potentially provide a futures contract at a specific price. The writer then tries to mitigate their risk by buying futures. Basically a covered call is a call sold against a long futures position. In order to succeed the futures bought must be generally stable in order to retain the options premium. The passage of time along with lower volatility make it unlikely that the options contract with be exercised. Losses using this strategy can be unlimited and as prices decline, the premium received from the sale of the call acts as a partial hedge against the futures position.

Long Strangle
This is one of many options strategies requiring larger price moves to be profitable. It is costly to execute because the options are out of money and losses are limited to the total premium paid. It has lower execution costs and as a result is used during very volatile price movements when trading options. In theory profits using this strategy are unlimited.

Short Strangle
This position profits in stable markets and is less costly to execute. It is also less risky because the strike prices are out-of-the-money. The short strangle takes advantage of premium income and they must be monitored very closely due to high potential for market movement in highly volatile markets. Profits using this trading strategy are limited to the premium received and the risks are unlimited.

Short Covered Put
This is a put option that is sold against a short futures position. This position is bearish (vs. bullish) and premium income can be earned if futures prices are stable to lower. If the options contract is exercised, it will be offset by the short futures position. The premium of the put increases income for hedgers and it simultaneously offsets the price level of the physical product. Losses are unlimited as the prices rally using this position, and the profits are limited on the downside.

Fence
This is one of many options strategies where the upside profit potential is limited but the net cost is low. This position requires the buying of a futures contract and hedging it with the purchase of an out-of-money put and the sale of an out-of-money call. Then the premium that is received for the call sale is used to subsidize the purchase of the put. A fence offers hedgers unlimited downside protection. The profit to loss profile is the same as the bull call spread strategy.

There are many more strategies available to investors who perform options trading. Continue to research different strategies to determine which trading strategies work best for you.

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