3 Effective Advanced Strategies for Options Trading

by | May 27, 2016 | Stock Market News Featured

Binary options trading allows traders to manage risks more efficiently. In this type of trading, you will be either selling or buying the assets, by using the 2 options, CALL or PUT. The different strike prices will be limited to a fixed expiry timeframe, which is when the trade ends.

This basic rule is used in binary options trading, where the traders can choose the money making opportunities, in accordance to their portfolio and risk sustaining capacity. You will typically get to see 3 kinds of price movements in the market – Bearish, Bullish and Neutral.

Advanced Strategies For Options Trading:

  1. Reverse ratio spreads (backspreads)

You can try this, when you speculate to see too much volatility in a specific stock, but don’t know the direction. However, if your prediction is correct, then you can make good profits, and if it moves in the opposite direction, then you can still make a small profit. However, if the prices don’t budge beyond the trading range, then you will incur a loss.

Call backspread – When market is bullish and highly volatile, buy 2 OTM call, and sell 1 ITM call. (Ratios can be any number)

(Out-of-money strike price is more than the existing stock price, and In-the-money means strike price is lower than the existing stock price)

Put backspread – When market conditions are bearish and highly volatile, then buy 2 OTM put, and sell 1 ITM put.

Remember to buy back backspread positions before they expire.

  1. Butterfly trading

Butterfly option positioning comprises of 2 vertical spreads, with a common strike price. In Butterfly trading you will be choosing an opening position, from where options are bought and sold at 3 different strike prices. The positioning of strike prices in butterfly trading makes it less risky. It is a neutral low-risk strategy, ideal for speculating volatility stocks.

Long butterfly – It includes buying 1 ITM call option, selling 2 ATM call option and buying 1 OTM call option. If stock does not move, you earn maximum limited profits, but if stock price rises too high or falls too low, you will suffer maximum but limited losses.

Short butterfly – It comprises of selling 1 ITM call option, buying 2 ATM call options, and selling one OTM call option. If stock price increases or declines, you earn limited profits, but if the prices are stable, then you incur losses.

Remember, long & short butterfly trading includes three strike prices, so the commission to be paid will also be thrice. You must calculate this extra commission, when you try to determine the profits in your portfolio.

  1. Strangles

Long strangles is best for high volatility stocks, and short is ideal for not-so volatile stocks. Strangle position is created by selling or buying matching set of put & call options, with OTM strike prices. Both options will have same expiry date.

Long strangle – It involves buying 1 OTM put option and 1 OTM call option with similar expiry dates. In case, stock falls or climbs, you gain huge profits, but if the prices remain stuck, then you lose the premium spent.

Short strangle – It includes selling 1 OTM put option and selling 1 OTM call option with the same expiry date. If the stock remains within the two strike prices then you earn profit, but if it moves up or down, then you will have to bear the losses.

Remember, Long & short strangle strategies are similar to straddle strategies. The only difference is in straddle strategy is that, both options have same strike price, whereas in strangle strategy; both options have two separate strike prices. Although you pay more commissions, you get some extra room for mistakes in strangles strike strategy.