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One Out of Many: Picking Option Trading Strategies


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Option Trading Strategies

Many Different Option Trading Strategies

Given the small number of variables involved, one would ordinarily suspect that picking option trading strategies would not be much more complicated than flipping a coin, but this is not the case. While the basic bull market call and bear market put strategies are certainly viable, they remain limited in usefulness when the market is not in full up or down mode. In times such as these, where the market seems poised to move in either direction, different options trading strategies need to be explored.

Refined Option Trading Strategies

• The long straddle is an option strategy that is often employed in cases where market uncertainty makes some sort of move likely but the direction of the move remains uncertain. The player purchase both a long put and a long call at the same strike level and date. Assuming the stock moves to a significant degree, the out of the money option is valueless and the other option pays off handsomely enough to wipe out the value lost with the expired counterpart option and provide a nice return on top of it.

• A variant of the long straddle is the long strangle, which works in the same fashion with the exception that the strike prices are different between the put and call rather than equivalent. The difference between straddle and strangle is that the straddle apportions risk equally in both directions, while the strangle can slant the equation somewhat in favor of the put or the call depending on the investors personal inclinations.

• Another options play employed during neutral markets is the iron condor. The iron condor involves the purchase of an out-of-the-money put and a similar call, coupled with the selling of an out-of-the-money put and equivalent call. While the other strategies are aiming at maximum return, an iron condor is a safer play that is more likely to pay off but less likely to pay off big time.

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