Trading options may be one of the safest was to invest in the stock market.  There are several strategies that can work well for you.

10 Options Strategies to Consider

By Max D.

Even if you’re new to options trading, you’re probably already familiar with buying puts and calls. These are the two most basic options strategies and the ones that rookie options traders gravitate to. That makes sense. Puts and calls are low-risk and easy to understand. Buy a put and you want the underlying security to go down in value. Purchase a call and you’re cheering for the underlying security to rise. Either way, you’re risk exposure is limited to the premium you pay to buy the contract. If the contract expires worthless, you lose nothing more than the cost of the contract.

To that end, we’re definitely fans of buying puts and calls, no matter what your level of options experience is. The potential for explosive returns without the need for betting the farm on each trade is unrivaled in the investing world. But we’re also fans of broadening our horizons and investing in options is one of the best places to do this. With so many different options strategies, there’s literally always a way to make a profit. Let’s look at the top 10 options strategies.

1. The Covered Call

Writing options means we are sellers of an options contract, which can be risky under some circumstances, but not with covered calls. In fact, covered call writing is probably the most conservative options-writing strategy because the contract you write is backed by your ownership of the underlying stock.

Let’s say you own 500 shares of a highly liquid blue chip stock like Microsoft. Microsoft isn’t very volatile and that makes it an ideal candidate for covered call writing. It’s a good idea to write calls on stocks that aren’t very volatile because we’re going to write out-of-the-money calls and collect some income in the form of a premium for doing so. Say Microsoft is trading at $23. We might write calls on the $25 strike for the next month’s contract. The risk here is that if the underlying stock rises above the strike price before expiration, the buyer of the call can call our stock away at $25, which is a discount to the market price.

Now you see why you have to own the stock you’re writing covered calls on and why you want to select stocks that are range-bound. As a rule of thumb, you would write one call contract for every 100 shares of the underlying you own.

2.The Married Put

Another fairly conservative options strategy is the married put trade. Married puts are a lot like covered calls in that you already own the underlying stock and you’ll buy an amount of puts equivalent to the number shares you own. Here, you’ll be long on the puts, but since you own the underlying stock, the puts act as a hedge. In other words, they give you a way to make money if the stock declines.

3. The Bull Call

There are several different options strategies known as spreads. One of the more basic ones is the bull call spread. In this trade, you buy calls at one strike price and then sell the same amount of calls at a higher strike price. So if you bought five Microsoft 25 calls, you might sell five Microsoft 27.50 or 30 calls. The contracts have to have the same expiration month and underlying security for the trade to be considered a bull call spread. This is a bullish strategy.

4. The Bear Put

The bearish cousin of the bull call is the bear put spread. Here you’ll buy puts at one strike price and then sell the same amount of puts at a LOWER strike price. Both strategies limit gains, but they also limit losses.

5. The Collar

As you can see, a lot of options strategies offer protection to investors. Another one of these trades is the protective collar. With a protective collar, you’ll purchase an out-of-the-money put option and write (or sell) an out-of-the-money call option on the same security. This strategy is used by investors that have already gotten substantial appreciation from the underlying security as a way of locking in profits.

6. The Long Straddle

Got a feeling that a stock is about to make a big move, but you’re not sure what way the move is going to go? That’s OK because you buy both a put and call with the same strike price and expiration on the same security. This is known as the long straddle and positions you perfectly to profit from a big move in the underlying, regardless of the direction.

7.The Long Strangle

A related strategy is the long strangle, but there’s a twist with this trade. With a long strangle, you’ll buy a put and a call on the same security with same expiration date, but with different strike prices. A strangle is usually a little cheaper than a straddle because you’ll be buying out-of-the-money contracts. And with both long straddles and strangles, your loss is limited to the cost paid to enter the trade.

8. The Butterfly Spread

The butterfly spread is an advanced options strategy that may seem confusing to the novice options investor. In a butterfly spread, we combine bullish and bearish spreads using three different strike prices. An example of a butterfly spread would include buying one put or call at the lowest or highest available strike price, then purchasing two of whatever we didn’t purchase in the first leg at higher or lower strike prices and then one final put or call at a lower of higher strike. Let’s try to make this easy to understand. Buy one call, buy two puts, then add another call. Voila, there’s your butterfly spread.

9. The Iron Condor

Another unique options strategy that is geared more to experienced options traders is the iron condor. The iron condor is risky and complex because you simultaneously hold a long and short position in two different strangles. This is the type of trade you need to research before randomly committing money to it.

10.The Iron Butterfly

And our final options trade that we think you ought to know is another butterfly. The iron butterfly allows investors to combine a long or short straddle with the purchase or sale of a strangle. With the iron butterfly we use both puts AND calls, not one or the other. Using out-of-the-money options is advisable to keep costs and risks to a minimum.

Article Source: http://EzineArticles.com/?expert=Max_D.
http://EzineArticles.com/?10-Options-Strategies-to-Consider&id=3264701