5 Online Options Trading Strategies

There are many opportunities to profit from online options trading. Whether the stock market is bearish or bullish, there is always an opportunity for huge returns by trading options. Investors who are bullish on a stock may decide to profit by purchasing calls against the underlying security. On the other hand, investors bearish on a stock could purchase a put option on the underlying security and generate lots of income when the share price drops.

In addition to buying or selling a call or put, investors can leverage several different online options trading strategies that combine various scenarios to lower ones risk in the market. The combinations and strategies are too numerous to list, but there are several widely used and sucessful strategies that are fairly easy to understand and implement. Each of these scenarios takes the best traits of each trade and combines them into a solid strategy that helps to lower risks while maximizing investment gains.

Here are 5 commonly used online options trading strategies that investors can implement, provided they understand how options work.

Covered Calls

Covered calls are popular online options trading strategies often used by long term investors. An investor must first purchase at least 100 shares (1 option = 100 shares) of the underlying stock in order to be covered. Once the stock has been purchased, the investor then sells call options against the security that is one or two strike prices out of the money. If the call contract is not exercised by the expiration date, the return on investment is the premium earned from selling the call(s).

The most successful covered call investors can build a solid stream of income by selling options each and every month.

In the Money Calls

Buying and selling in the money calls can offer huge returns in the matter of a few days or weeks. An investor who is bullish on a stock can purchase call options that have a strike price well below the current share price. Once the calls are purchased, the investor must wait for the stock to breakout to the upside and then sell the calls back. The difference in the premium is the return on investment.

Deep in the money calls is a widely used online options trading strategy. Smart investors look for beaten down blue chip stocks that are oversold. If an investor can time the market right, they can pick up some cheap calls and unload them as the stock makes any kind of upward movement. However, if the stock suddenly falls, then the call options become less valuable, which can mean a potential loss on investment.

Straddle

Straddles are a unique type of online options trading scenario. An investor must purchase both puts and calls with the same strike price and expiration date. By doing so, an investor has capped their risk and is hoping for a huge swing in the stock in either direction. If the stock falls dramatically, then the put options will become much more valuable than the calls. On the other hand, if the stock rises, the calls will become more valuable than the puts.

One of the downsides to straddles is the large upfront costs associated with purchasing both puts and calls. In addition, if the stock doesn't move drastically up or down, the calls and puts will hold the same value putting the investor back where they started.

Collars

Trading collars is another popular online options trading strategy that can be successful for investors. In order to execute the strategy, an investor must purchase shares of the underlying stock, buy an at the money put, and sell a out of the money call. Properly following this strategy can sometimes completely remove any associated risk with the investment. The downside is that using this strategy can be costly to an investor and often takes time to realize the benefits.

Depending on the level of risk that an investor is willing to take on will determine how soon a collar strategy can pay-off. The further out the options contracts are into the future, the lower the risk on the investment. There are plenty of variations of trading collars, so it is important to research the right plan based on the level of acceptable risk.

In the Money Puts

A bearish online options trading strategy that can be used is buying deep in the money puts. This type of trade is similar to buying in the money calls, only in reverse. Instead of having a bullish opinion on an investment, buying puts is holds a belief that a stock is going down. The strike price of a in the money put should be higher than the current share price. The higher the strike price is above the current share price, the lower the risk. The trade off is a higher premium paid to purchase the put contracts.

Investors can profit once the share price ends up dropping by selling back the put for a higher premium. The net difference is the return on investment, which can often be huge. The downside to this strategy is if the stock rises instead of falling. As a stock rises, the value of a put option decreases, thus lowering the total value of the asset. This is why trading deep puts is a smarter option and can help lower the risk of this type of investment.

These option trading strategies are just a few of the more popular scenarios used by experienced investors today. There are plenty of other strategies that are more complex and harder to implement for the average investor. These complex scenarios should be saved for experienced investors with several years of trading experience under their belt.

Investors looking to leverage the power of options trading can look to covered calls, in the money calls and puts, straddles, and collars as potential strategies. Each of them has the potential to both lose and earn money. The key is understanding how they work and having the discipline to follow and stick with the plan. Options trading can be a wonderful tool, just as long as they are not abused and implemented with a plan.