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| Strategy Builder - User guide Back to main page | |||
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Strategy basics Strategy – A combination of several actions of buying or selling options. There are common strategies for different time periods and different market trends (bullish, bearish, etc.). A skilled trader can improvise and develop his own strategies. The main purpose of a strategy is minimizing the risk, by hedging the potential loss, while trying to maximize the profit. Strategies for bullish market: Bull spread - buying a call option at strike X, and selling a call option at a higher strike. The profit will be higher as the underlying index goes up, and the loss is limited to the strategy cost. Synthetic long stock - a more risky strategy of buying a call option and selling a put option at the same strike. One of the advantages is neutralizing the time factor. Since the potential loss is unlimited you can minimize the risk by buying and selling protective options in each side. Strategies for bearish market: Bear spread - buying a put option at strike X, and selling a put option at a lower strike. The profit will be higher as the underlying index goes down, and the loss is limited to the strategy cost. Synthetic short stock - a more risky strategy of buying a put option and selling a call option at the same strike. One of the advantages is neutralizing the time factor. Since the potential loss is unlimited you can minimize the risk by buying and selling protective options in each side. Strategies for volatile market: Long straddle - buying a call and a put option at the same strike, expecting the underlying index will move to one of the directions. The potential loss is limited to the strategy cost, and the profit will be higher as the index goes farther up or down. Long strangle - similar to Long straddle, but here there is a gap and the call option is at a higher strike than the put option. Strategies for steady market: Short straddle - selling a call option and a put option at the same strike. Since the potential loss is unlimited we usually buy protective options on each side. The risk is higher if the protective options are farther, but so is the potential profit. Short strangle - similar to Short straddle, but here there is a gap and the call option is at a higher strike than the put option. we buy protective options for the same reasons. Short strangle is less risky than Short straddle, but has a lower potential profit. |
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| Strategy Builder - User guide Back to main page |