Too often, traders jump into the options game with little or no understanding of how many options strategies are available to limit their risk and maximize return. Aside from purchasing a naked call option, you can also engage in a basic covered call or buy-write strategy. In a married put strategy, an investor who purchases (or currently owns) a particular asset (such as shares), simultaneously purchases a put option for an equivalent number of shares. In a bull call spread strategy, an investor will simultaneously buy call options at a specific strike price and sell the same number of calls at a higher strike price. A protective collar strategy is performed by purchasing an out-of-the-money put option and writing an out-of-the-money call option at the same time, for the same underlying asset (such as shares).
A long straddle options strategy is when an investor purchases both a call and put option with the same strike price, underlying asset and expiration date simultaneously.
In a long strangle options strategy, the investor purchases a call and put option with the same maturity and underlying asset, but with different strike prices. All the strategies up to this point have required a combination of two different positions or contracts. With a little bit of effort, however, traders can learn how to take advantage of the flexibility and full power of options as a trading vehicle. In this strategy, you would purchase the assets outright, and simultaneously write (or sell) a call option on those same assets.
In this strategy, the investor will simultaneously purchase put options as a specific strike price and sell the same number of puts at a lower strike price.
The put strike price will typically be below the strike price of the call option, and both options will be out of the money. In a butterfly spread options strategy, an investor will combine both a bull spread strategy and a bear spread strategy, and use three different strike prices.
In this strategy, the investor simultaneously holds a long and short position in two different strangle strategies. Your volume of assets owned should be equivalent to the number of assets underlying the call option. This strategy allows the investor to maintain unlimited gains, while the loss is limited to the cost of both options contracts.
For example, one type of butterfly spread involves purchasing one call (put) option at the lowest (highest) strike price, while selling two call (put) options at a higher (lower) strike price, and then one last call (put) option at an even higher (lower) strike price. Losses are limited to the costs of both options; strangles will typically be less expensive than straddles because the options are purchased out of the money.
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