In the world of options trading, traders use many different techniques to try and take advantage of opportunities in the market. Some of these techniques are more popular, and the most experienced and successful traders only use some.
In this article, we will look at some of the most popular options trading techniques used by professional traders. Always trade with caution and use an experienced and reliable online forex broker like Saxo Markets before trying these techniques.
One of the most popular techniques is “spread trading”, which involves buying and selling two different options contracts simultaneously. Traders do this to try and take advantage of the difference in price between the two contracts.
The advantages of spread trading are that it can be used in market conditions and doesn’t require much capital. The downside of spread trading is that it can be risky, and traders must be cautious when choosing their contracts.
To make money from spread trading, traders need to predict which direction the market will move correctly. If they think the market will go up, they will buy a call option and sell a put option. If they think the market will go down, they will reverse.
The risk of spread trading is that the market could move in either direction, and the trader could lose money. To limit this risk, traders often use stop-loss orders. If the market moves against them, their losses are limited to a certain amount.
Another popular technique is “straddle trading”, which involves buying both a call option and a put option simultaneously. The options will have the same strike price and expiration date.
The advantage of straddle trading is that it doesn’t matter which direction the market moves, as the trader will be able to take advantage of any one of the options. The downside is that it can be expensive to set up, as you must buy two options contracts.
To benefit from straddle trading, traders need the market to move enough towards one of the options. The trader will lose money if the market doesn’t move or only moves a small amount.
A variation of straddle trading is known as “strangle trading”, which involves buying both a call and put option but with different strike prices. The options will again have the same expiration date.
The advantage of strangle trading is that it’s cheaper than straddle trading, as only one option needs to be paid for the trade to be advantageous. The downside is that a more significant movement is needed for the trade to be worthwhile.
To make money from strangle trading, traders need the market to move enough to find opportunities using one of the options. The trader will lose money if the market doesn’t move or only moves a small amount.
Another popular technique is “arbitrage trading”, which involves taking advantage of price differences in different markets. For example, a trader might buy stock in one market and then sell it immediately in another market where the price is higher.
The advantages of arbitrage trading are that it can be done quickly and easily with a computer and doesn’t require much capital. The downside of arbitrage trading is that it can be risky, as prices can change quickly.
To make money from arbitrage trading, traders need to buy in one market and sell in another market quickly. They also need to have a good understanding of the markets and market trends they are trading in.
The final word
These are just some of the most popular options trading techniques professional traders use. While there are many other techniques, these are the most commonly used. Each trader will have their preferences and methods, and it’s essential to find what works best for you. If you’re new to options trading, starting with simple techniques and moving on to more complex ones as you gain experience is a good decision.