Basic Options Trading Strategies – Calendar Spread, Straddle and Strangle

Options contracts and investments can be a more complicated way to invest your money. There are a variety of options contracts, including LEAPs (long-term contracts), barriers, compounds, choosers and other exotics and technical data to best measure the potential volatility and movements in the price of an asset.

Some of the complicated measurements can be simplified for the average investor. You can choose basic option trading strategies to best learn your way around these options contracts possibilities. Most of the strategies operate with the idea that the options have an expiration date and strike price that is very specific. With these unusual factors, you can use strategies that would not be available in traditional stock investing.

The calendar spread or time spread is a specific type of investment strategy that has the investor simultaneously buying and selling two similar options with the same type, same strike price but with different expiration dates. The idea here is to gain a profit from the difference in the price as each contract comes closer and closer to its expiration date.

The straddle strategy is when an investor holds the call and the put of the same asset with the same expiration date and the same strike price. At first, this seems like you are betting against yourself and could not be a smart investment strategy. But if you see it as a positive, you could see that no matter which way the price went, you would gain, offsetting your risk issues in options trading.

The final strategy is something called a strangle. The investor will hold a call and a put and put the options contract on the same expiration date. They will have different strike prices, however. The contracts will be purchased “out of the money” and will cost less for the investor to buy them. When you buy something “out of the money” it is less expensive because the strike price is higher than the asset (in a call) or lower that the asset (in a put) than what the market price is showing the asset to be worth. The premium or purchase price will be lower because if the investor were to sell the options contract right away, they would see an immediate loss for the investment. The immediate risk is what will lower the price.

Depending on how the market does and how the individual asset performs, you will either see a huge profit or loss. If you have a stock trading at $30/share, you could put in a call at $3 and a put at $2 with a strike price of $35 and the put at $25. In this way, you cover the bases on both ends. If the price of the stock stays between $25 - $35, you will lose the total cost of the options or the premium. But if it drops below $25, your call will be worthless, but your put will be profitable. You can write off the loss against capital gains taxes. It is possible for the average investor to do this at home, but you will need to be very careful.

         

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