Options Trading Under Any Market Conditions
There are many financial products that can be traded in the stock market, out of which, the most popular is stock option trading. Options are popular because they can be used in almost any market condition, and for almost any investment purpose as well. An ideal stock investor is one who is able to reap a profit out of his/her stock options in any market situation. On the other hand, if an investor can make a profit only when the market is in an upward swing, then he or she will find it a very difficult prospect to have any kind of substantive success, leave alone becoming a millionaire.
Though investors tend to think that making a profit when the market is down is a Herculean task, experts say it is not only possible but also easy to do so. The ability to trade in any market condition is the doorway to becoming a stock market millionaire, and the key to go through that doorway is option trading. Enumerated below are some useful strategies for option trading:
Markets buy call option: Let’s start with this one. This strategy is really very simple but highly functional. It tells the investors to buy the same number of equivalent stocks for a fraction of the price using call options, and reap profits when the stock goes up. Even if the stock crashes, the investor will lose only the small amount that was used for buying the option, and not the whole amount that would have been used to buy the stock itself.
Sell naked with put option: According to this strategy instead of buying a call option the investor should go for selling short put options. By using this method, the investor can pocket the entire amount made on selling the put options in case of the stock going up. The investors can also go for Bull Call spread, which means that they can buy call options at the money and then selling short out of the money call option of the same month. The best part of this strategy is that it always creates a win-win situation for the investors, i.e. they can profit both when the stock is up and also when the stock stays sideways.
Simple option strategies for down MarketsBuy put option: This strategy advises the investors that they can save their margin call by simply buying a put option instead of shorting on stocks. Buying a call option is same as buying a put option except for the fact that the investor will make a profit when the stock goes down instead of up.
Selling naked call option: Investors can exercise this option for making a profit when the stock goes down. Instead of buying a put option they can go for selling short call options thereby pocketing the entire amount made on selling put options.
Bear Put Spread: This consists of investors buying put options and selling short put options of the same month. By using this strategy you can profit when the stock goes down and also when it stays sideways.
Simple option strategies for up or down markets straddle: A straddle means buying a call option and a put option at the same strike price on the same stock. This strategy is an excellent protector when you are sure that the stock will move greatly and soon, but are not sure in which direction.
A similar concept is ‘Strangle’, but this allows buying out of call option and put option instead of the money ones to reduce the cost of production.
Simple option strategies for a sideways market condition or covered call: If an investor holds on to a sideways moving stock, then he or she can collect rental from it by selling the call option of that stock for many months, and pocket the whole amount of sale if the stock stays sideways.
Short Straddle: According to this strategy the investor can sell his/her stocks in short instead of buying call and put options, as was described in the ‘straddle’ strategy above. By this method, the investor can create an option position that will be profitable even when the stock remains sideways.