Options provide traders with higher flexibility, rather than just purchasing or selling a particular asset. An options contract provides the buyer a right, but not an obligation, to sell or buy the underlying asset at a particular price before or on a particular date. Traders can also use options to hedge existing positions, take a view on future price fluctuations or generate income.

For a trader new to the market, it is important to understand the option trading strategies available because different strategies are created for different market expectations. Some of them are based on a price increase, some on a decrease, while others are created for markets that stay within the range.

Option Trading Strategies

An options strategy includes one or more options positions to create a specific market setup. A strategy may include purchasing or selling calls and puts or combining several contracts with different strike prices and different expiration dates.

Strategies can be used broadly when the trader expects the following situations:

• An increase in the price
• A decrease in the price
• A price movement in either direction
• The price remaining within a particular range
• Protection against a decline in an existing position
• Option Trading Strategies Every Beginner Must Know

Some of the strategies that simplify options trading for beginners include the following:

• Long call

A long call includes purchasing a call option. Traders can use this when they expect the underlying asset to increase in price. The buyer has to pay a premium for the option. The maximum loss on the option stays limited to the premium paid; however, the potential gain on the same can increase when the underlying asset rises.

For beginner traders exploring futures and options trading, a long call is among the most basic single-leg strategies to understand before moving towards more complex combinations.

• Long put

A long put includes purchasing a put option. A put provides the buyer the right to sell the underlying asset at a specific strike price. This strategy can be used by traders when they are expecting the underlying asset to decline. Similar to a long call, the maximum loss for a purchased put stays limited to the premium paid for the option.

• Covered call

This call combines ownership of an underlying asset along with the sale of a call option on that asset. The strategy can help traders generate income through the received premium from selling the call.

However, traders might have to sell the underlying shares at the strike price of the call if the option is exercised. This means that the strategy can limit the benefit from a rise in the price of the asset.

• Bull call spread

This involves purchasing a call at a lower strike price and selling a different call at a higher strike price, with both of the options having the same underlying asset and expiration date.

This is used generally when a trader expects a moderate increase in the underlying asset. However, selling the highest strike call may reduce the initial cost of the position, but it also limits the potential profit.

• Bear put spread

A bear put spread uses two put options with the same underlying asset and expiration date. The trader purchases a put at a higher strike price and sells another put at a lower strike price. This strategy is implemented if the trader expects the underlying asset to decline. Both the potential gain and potential loss are limited by the structure of the spread.

• Long straddle

A long straddle includes buying a call and a put with the same underlying asset, strike price and expiration date. The strategy is used when a trader expects a significant price movement but is uncertain about its direction. The position can benefit if the underlying asset moves sufficiently far upward or downward to cover the premiums paid.

• Long strangle

A long strangle is like a long straddle, but the call and put have different strike prices. Both options come with the same underlying asset and expiration date.

It can be used when a trader expects a significant move but does not know whether the asset will rise or fall. Since the options are generally out of the money, the strategy can cost less than a straddle, but the underlying asset needs to make a sufficiently large move for the position to become profitable.

Conclusion

Options strategies range from simple single-leg positions, such as long calls and puts, to multi-leg combinations such as spreads, straddles and strangles. Each F&O trading strategy has a different structure, market outlook and risk profile. Understanding how an option works, what the strategy is designed to achieve and how much can potentially be gained or lost can help traders evaluate a position more clearly.