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When it comes to options trading, there are probably as many strategies out there as there are traders.
But if you're just getting started, we've got three of the most effective options trading strategies you can employ to earn big, fast profits.
These simple trading strategies can be mastered by anyone. And they don't require you to spend all day watching your computer monitor. Even if you've just started trading options, strategies like these will get you on the road to wealth in short order.
So let's get to it. Here's our list of the best options trading strategies…
Most Effective Options Trading Strategies, No. 3: the Long Call
The long call might be the simplest of all options strategies.
It's also one of the most effective if you play it right.
It's essentially a bet that a stock will rise in share price within a given amount of time. So all you have to do after buying a long call is watch the price move – hopefully in your favor.
If you are especially bullish on a stock for the immediate future, a long call allows you to capitalize on that rise in share price significantly more than if you simply bought shares outright.
How much more?
Consider the case of a long call recommended by Money Morning's options trading specialist, Tom Gentile, in the spring of 2018.
Tom looked at the stock for consumer review company Yelp Inc. (NYSE: YELP) and saw a pattern: The share price tended to rise just before earnings announcements, even if it didn't always stay elevated after the report came out.
He suggested that readers buy a long call option about three weeks ahead of Yelp's next earnings date, and then close it out just before the announcement.
Sure enough, Yelp's shares rose 6.9% over the next three weeks.
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And sure enough, the price dropped again not too long after the earnings date. But anyone who took Tom's advice didn't care.
Not only had they closed their positions before the price dropped, but they multiplied their gains many times over by opting for long calls rather buying Yelp shares.
That 6.9% rise in share price translated to a 64% gain using the long call strategy – more than nine times the profit!
When you buy call options – usually in bundles of 100 shares – you are controlling a much larger number of shares than you could buy if you purchased the stock directly. And when the trade moves in your favor, you benefit by having a larger stake for less money up front.
And yet, you can still only lose as much as you paid up front. Realistically, though, you don't even risk that much, since you can always close your position if the price doesn't move your way. That way, even in the worst-case scenario, you can still recoup a significant amount of what you paid in the beginning.
As you get more advanced, you'll learn about even more techniques – like the bull call spread – to mitigate losses when your bets don't work out.
So you're not taking on a lot of extra risk with the long call strategy. And when things do go your way, you'll be looking at a handsome payday.
Now for the next entry on our list of options trading strategies…
Most Effective Options Trading Strategies, No. 2: the Straddle
Sometimes you're fairly certain a stock is going to move. The only problem is you're not sure if the movement will be up or down.
That's where the straddle comes in.
With this strategy, you buy both a call option and a put option. That way it doesn't matter what direction the stock price goes. As long as it moves, you'll have one winning position. And if it moves significantly – which is what you're betting on – your winning position should cover your losing position and then some.
Just like with the long call, earnings season is a great time to put this strategy into action.
That's a time when stock prices are frequently on the move – but sometimes unpredictably and irrationally.
A straddle relieves you of the burden of trying to guess which way investor sentiment is going to go. The only thing that's important is that it's moving.
Back in January 2018, Tom Gentile recommended a straddle on Johnson & Johnson (NYSE: JNJ) just ahead of its earnings report. He wasn't sure how the report would turn out, but he suspected the stock would move one way or another.
In fact, the stock price quickly fell from $148 to $140. That was in spite of the fact that the company beat earnings expectations – demonstrating how counterintuitive the market can be sometimes.
The price of the at-the-money call and put options together was $6 per share. And the $8 drop in share price was more than enough to make that a profitable trade.
Typically a straddle is done at the money. That way, as soon as the stock price moves, one of your options will be in the money. But you can also buy two out-of-the-money options – usually an equal distance from the current share price – and turn it into a strangle.
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The strangle reduces the biggest disadvantage of a straddle: the entry costs. You have to buy two options, not one. But choosing out-of-the-money options lowers the up-front cost.
The disadvantage of the strangle is the stock price has to move by a larger amount to work in your favor.
But if you're fairly certain of a big swing, the strangle might be the right play for you.