Various trading Strategies are used in Option Trading. Few most popular strategies used in Option Trading are given below.
(I) Straddles and Strangles
Straddles and Strangles are used when the trader is expecting a strong move in the prices of the underlying asset i.e Upward or Downward.
Straddles
A straddle consists of buying a call option and a put option both with the same strike price and maturity.
(a) If there is a drastic decrease in price, profit is made on the put option.
(b) In the case of drastic increase in price, the call gives the profit.
(c) For moderate movements, a small loss is there.
Strangle
A Strangle is similar to Straddles except that the strike price of the Call option and Put option are different.
(II) Strip and Strap
Strip
A Strip is used when, there is a expectation that the price of underlying asset will move but not sure about direction of price movement of underlying asset ( more chance of prices are going upward ).
A Strip is consists of buying One call option and Two Put options with the same underlying asset, same Strike Price and the same expiration date.
Strap
A Strap is used when, there is a expectation that the price of underlying asset will move but not sure about direction of price movement of underlying asset ( more chance of prices are going downward ). A Strap is consists of buying Two call option and One Put options with the same underlying asset, same Strike Price and the same expiration date.
(III) Butterfly
This strategie is used when the trader is expecting insignificant movement in the price of the underlying asset. This strategy may result in small amount of profit with limited Loss.
It involves positions in options with Three different Strike Prices. It can be created by buying a call option at relatively low strike price, buying a call option at relatively high price and selling two call's with a strike price of average of two call options i.e average of lower and higher price.
(IV) Condor Spread
This strategie is used by those traders who are expecting insignificant movement in the price of the underlying asset. This strategy may result in small amount of profit with limited Loss.
The condor spread is an option trading Strategy which profits from stocks which are trading within a tight price range ( Example :- BTC was trading in a price range of $8,000-$10,000) It is similar to the butterfly but involves four strike prices instead of three strike prices, resulting in wider profitable range. The strategy can be either call based or put based but never Call and Put used together.
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