By: Wayne Duggan
Many people who want to take the next step in their trading turn to options. Options can be a great way to hedge downside, control more capital with less risk, or make a speculative play.
And much like stock trading strategies, option trading strategies can be as simple or as complex as you want to make them. Here’s a quick look at 5 basic call option strategies. For more details on each, check out our education center.
1. The Long Call
It doesn’t get any simpler than the long call strategy. This strategy involves buying call options and hoping the share price of the underlying stock rises above the strike price before the option expires. In that respect, it’s extremely similar to simply buying the underlying stock itself. Going long call options can provide much higher returns than buying the same amount of underlying stock, but it can also be much more risky.
2. The Covered Call
One very popular strategy people use to maximize potential profits on stocks already in their portfolio is the covered call strategy. This involves selling call options on a stock that you already own. The goal here is to earn income (via the premium from the call option), while also benefiting from the stock rising. Covered calls provide a short-term hedge for people who are still bullish a stock.
3. Bull Call Spread
Traders utilizing the bull call spread technique purchase call options at a specific strike price and expiration date, and then simultaneously sell the same number of call options for the same date at a higher strike price. The idea behind the strategy is that selling the call options at the higher strike price will reduce the overall cost of the trade. The potential downside to the strategy is that upside is capped at the strike price of the calls that are sold.
4. Bear Call Spread
The bear call spread strategy involves purchasing call options at a high strike price and then selling the same number of call options for the same expiration date at a much lower strike price. When you initiate the trade, the calls sold at a lower strike price will always generate more income than the calls purchased at a higher strike price. If the share price of the underlying stock trades lower than the strike price of the calls sold, you keep that cash. If the stock trades higher, the calls purchased mitigate the upside risk.
5. Long Call Butterfly
If you’ve got a specific price target for a stock and a specific date in mind for a trade, a long call butterfly can be the best way to use call options to make a big bet on a stock at a relatively low cost. To initiate a long call butterfly trade, sell two call options with a strike price equal to your target price for the stock. Then buy a call option at a lower strike price and sell a call option at a higher strike price. Ideally, the stock will hit the target price and all the call options sold will expire worthless while the lone call option purchased will generate profits. The long call butterfly generates maximum profits if the stock trades to exactly the strike price of the pair of call options initially sold.
To learn more about basic option trading strategies and see examples of how to execute option trades, visit the Lightspeed option trading education center.
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