Option Strategies

An option is a contract giving the buyer the right to buy or sell an underlying asset like stock at a fixed price on or before a certain expiration date. Remember this is a right and not obligation. There are basically two types of option contracts: Call options and Put options. A Call gives the buyer the right to buy the underlying asset, while a Put gives the buyer the right to sell the underlying asset.

The basic strategy for option trading is call and put. When you believe that a stock if going to be up, buy call option. But if you believe the price will go down, buy put option.

You can create advanced option strategy by combining the two basic option contract. For example you can create a new option strategy by buying one put option and selling another put option with different expiration date and strike price. Each strategies will have different characteristic, so you need to understand the profit and loss probability of a combination.

There are also option strategy that can generate income. This happens when you are selling an option contract at higher price and buy another option contract at lower price. For example you can sell a put option for $100 and buy another put option for $80, making $20 profit. The most popular income option strategy are Iron Condor. It is constructed by combining Bull Put Spread and Bear Call Spread. Bull Put Spread is constructed by selling an in-the-money (ITM) put option (higher price) and buying an out-of-the-money (OTM) put option (lower price) on the same stock with the same expiration date. While Bear Call Spread is constructed by selling an in-the-money (ITM) call option (higher price) and buying an out-of-the-money (OTM) call option (lower price) on the same stock with the same expiration date. With Iron Condors you don't have to guess the direction of a stock. This strategy is mostly used when we have a neutral outlook of a stock.

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Make money with iron condor

Most option strategies are are centered around making the right call on the direction of a stock. This approach relies on the accuracy of guessing the direction of the stock. Thus the chances of profiting are low. By using a combination of Bull and Bear Credit Spread, an Iron Condor position can be created. It will have minimal risk and higher probability of success. With Iron Condor, you don’t need to guess the direction of stock. This strategy is mostly used when we have a neutral outlook on the movement of the options underlying security. It’s a good idea to implement this strategy on security (stock) with low volatility, because their price tend not to move much.
Iron Condors is usually used by traders who seek income from their trading capital. They will construct the posistion so that it will still profit for a much more price movement. For example if the current price is $40, instead of creating a position where it will profit when the price moves up/down $10 (price between $30 – $50), a trader can create a position where he can still profit when the price moves up/down $20 (price between $20 – $60).
By using this strategy, trader would generate monthly income.
Since it is from a combination of bull put spread and a bear call spread, you need to understand them first. The bull put spread is implemented by selling an in-the-money (ITM) put option (has higher price) and buying an out-of-the-money (OTM) put option (has lower price) on the same underlying stock with the same expiration date. While the bear call spread strategy is implemented by selling an in-the-money (ITM) call option (has higherice) and buying an out-of-the-money (OTM) call option (has lower price) on the same underlying stock with the same expiration date. Both bull put spread and bear call spread has limited profit and risk.
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