Option traders employ bullish techniques when they expect an upward movement in an underlying assets’ share price. A bearish technique is considered suitable when the stock price is predicted to fall. Cautious traders apply neutral techniques, when they do not know the direction in which an asset share price will move. Option trading strategies help traders hedge their position and make profits from asset price movements.
Bullish trading techniques can be employed when a trader believes the underlying stock price will move up in the foreseeable future. The technique chosen would depend on the traders’ assessment of the time line within which a rally will occur and the expected increase in the underlying share price. Bullish strategies are aggressive, moderate or mild.
Traders can also make profits from a downward movement in the value of an underlying asset, if they can predict it correctly. Aggressive, moderate and mild bearish approaches can be used to good effect within the expected time limit of a fall in value. Dealers have to be assured they can correctly forecast how steep the fall in value will be.
Traders employ neutral options strategies (or non-directional) when they can not predict whether an underlying share price will go up or down. The ability to make a profit in these situations is not dependent on the upward or downward movement of the underlying assets’ valuation. Instead, it is dependent on the estimated volatility of the assets’ price. Neutral techniques include guts, butterfly, and straddle (long and short) and strangle.
Bullish on volatility and bearish on volatility techniques are a further breakdown of neutral option techniques. In highly volatile scenarios, bullish on volatility approaches such as the long strangle, long straddle, short condor and butterfly will meet traders’ strategic requirements. Bearish on volatility techniques like ratio spreads, long condor, short straddle and short strangle would help a dealer make the most of a little or no movement in price.
Trading approaches can also be used to hedge traders’ positions. Thus, reducing traders’ vulnerability by purchasing simultaneous long and short contracts of the same underlying asset. These approaches are also known as combination strategies, because they involve applying multiple leg structures to reduce risks.
Option trading strategies can support various movements in the value of underlying assets. A dealer’s expectation of the future would determine which technique he/she will apply in a scenario. However, it is advisable to seek expert guidance for clarity.
There are many tested option trading strategies that traders can use for making profitable trades in the market. High probability trading is the target for every trader and is possible with the right techniques.