As an investor, it’s essential to understand the markets and how each trade works to be successful. One of the most popular ways to speculate on the markets is through listed options trading. The UK has some of the most developed options markets in Europe, and traders can take advantage of this by becoming pro-listed options traders. Before exploring advanced strategies, traders must grasp the basics and ensure their trading plans are always tailored to their needs. Once comfortable with listed options fundamentals, various advanced strategies are available for traders who want to get more sophisticated with their positions and increase their potential profits.
Straddle
A straddle is a popular advanced trading strategy involving simultaneous buying or selling of both calls and putting on the same underlying asset. It exposes traders to rising and falling markets, as profits are made when either direction is volatile. To understand how this works, traders must become familiar with option Greeks such as delta, vega, and gamma – which help to measure the sensitivity of options prices to changes in the underlying stock price. A broker such as Saxo Bank can help you understand the Greeks. When executed correctly, straddles can provide traders with more significant potential profit than simply buying or selling a single option.
Put spread
The put spread is another advanced strategy that involves buying and selling the same number of put options with different strike prices. This strategy is generally used when traders expect a dip in the market, as profits will be made when the stock price falls within the range of strike prices. Understanding how implied volatility works is essential to properly execute this strategy; too much volatility can result in losses for the trader rather than gains. The main benefit of using a put spread over a single option is that it reduces risk and has the potential for more significant profit should the underlying asset move beyond one of the strike prices.
Strangle
A strangle is similar to a straddle, as it involves the simultaneous purchase or sale of call and put options with different strike prices. The main difference between the two strategies is that in a strangle, the strike prices will be further away than for a straddle – meaning that there is more potential for profit if either option expires in the money. This strategy can be used when traders expect large movements in the underlying asset but are unsure in which direction these will occur. It’s also essential to understand how implied volatility works here, as this can affect profits significantly.
Butterfly
The butterfly strategy is quite complex but offers higher rewards than other strategies. It involves the simultaneous purchase of one call option at a specific strike price, two further out-of-the-money calls, and the selling of two in-the-money calls between those purchased. The main advantage here is that traders can benefit from a high potential reward with limited risk. It’s essential to understand how implied volatility impacts this strategy, too; too much volatility could result in losses rather than gains for the trader.
Calendar spread
The calendar spread is another advanced strategy that takes advantage of time decay when trading options. It involves buying longer-dated options while selling shorter ones on the same underlying asset. The goal here is to benefit from the decay of the shorter-dated option (which decreases in value faster than the longer-dated option) and any potential price movements in either direction for the underlying asset. Again, understanding how implied volatility affects the prices of options is critical to successfully executing this strategy.
In conclusion
Advanced options trading strategies offer traders the potential to benefit from significant gains with limited risk. While these strategies can be complex, traders must become familiar with option Greeks and implied volatility to truly understand how they work and how to execute them successfully. With some research and practice, traders should be able to use advanced strategies to potentially maximise their profits in the UK options market.