Option Trading Strategies with Limited Risk

Bullish Option Trading Strategies

Long Call – Buy calls in a bullish market with at least 45 day until expiration.

Bull Call Spread – Buy ATM (lower strike price) call and sell OTM (higher strike price) call with 45 days or greater until same expiration date in moderately bullish markets that are trending up.

Bull Put Spread – A credit spread buying OTM (lower strike price) put and selling ATM (higher strike price) put with 30 to 60 days until same expiration date in moderately bullish markets that are trending up.

Diagonal Bull Call Spread – This trade is a combination of a Bull Call Spread and a Call Calendar Spread. Buy ATM (lower strike price) Call with 60 days or greater to expiration. Sell OTM (higher strike price) Call with at least 30 days until expiration and at least 30 days less until expiration than purchased Call. This is a good trade to do with LEAPS in combination with short-term options.

Call Ratio Backspread – Sell lower strike calls and buy a greater number of higher strike calls (1 to 2 or 2 to 3) in a market with a reverse volatility skew where you anticipate a sharp price rise with increasing volatility. Look for even or net credit trades where possible.

Bearish Trading Strategies

Long Put – Buy puts in a bearish market with at least 45 days until expiration.

Bear Put Spread – Buy ATM (higher strike price) puts and sell OTM (lower strike price) puts in moderately bearish markets that are trending down or reaching new lows with 45 days or greater until expiration.

Bear Call Spread – A credit spread buying OTM (higher strike price) call and selling ATM (lower strike price) call with 30 to 60 days until same expiration date in moderately bearish markets.

Diagonal Bear Put Spread – This trade is a combination of a Bear Put Spread and a Put Calendar Spread. Buy ATM (higher strike price) Put with 60 days or greater to expiration. Sell OTM (lower strike price) Put with at least 30 days until expiration and at least 30 days less until expiration than purchased Put. This is a good trade to do with LEAPS in combination with short-term options.

Put Ratio Backspread – Sell higher strike puts and buy a greater number of lower strike puts (1 to 2 or 2 to 3) in a market with a forward volatility skew where you anticipate a sharp price decline with increasing volatility. Look for even or net credit trades where possible.

Neutral Option Trading Strategies

Call Calendar Spread – Buy one long term call with 90 days or greater until expiration and sell one short-term call with 45 days or less until expiration at same strike price in stable markets. Repeat sale of another short-term option if time permits on long term option to capture additional time premium. Hold long option if market looks ready to break out in an upward direction.

Put Calendar Spread – Buy one long term put with 90 days or greater until expiration and sell one short term put with 45 days or less until expiration at same strike price in stable markets. Repeat sale of another short-term option if time permits on long term option to capture additional time premium. Hold long option if market looks ready to break out in an upward direction.

Volatile Option Trading Strategies

Long Straddle – A delta neutral strategy best placed in a market with high volatility at a time when volatility is low and where you anticipate a volatility increase. Purchase an equal numbers of ATM puts and calls with 45 days or more until the same expiration date.

Long Strangle - A delta neutral strategy best placed in a highly volatile market at a time when volatility is low and where you anticipate a sharp volatility increase. Purchase an equal numbers of OTM puts and calls with 45 days or more until the same expiration date.

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Site Updated by Insightful Ideas, Inc. July 16, 2010