Options trading strategies: from covered calls to protective puts

Options trading is a popular investment strategy that allows traders to make profits by buying and selling financial contracts. With the rise of online trading platforms, options trading has become more accessible to individuals looking to diversify their investment portfolios. In Singapore, options trading is gaining popularity among investors due to its potential for higher returns than traditional stocks and bonds.

However, with different options trading strategies available, it can be challenging to determine which one is best suited for you. This article will discuss the various options trading strategies commonly used in Singapore, providing an overview of each strategy, its benefits and limitations, and some tips on effectively implementing them.

Long call strategy

The long call strategy is a straightforward options trading strategy that involves buying a call option on an underlying asset with the expectation of its price to increase. A call option gives the buyer the right, but not the obligation, to purchase the underlying asset at a specified price (strike price) within a certain period (expiration date).

The benefit of this strategy is that the trader has limited risk. If the price of the underlying asset does not increase, the investor will only lose the premium paid for the option. On the other hand, if the price of the underlying asset rises significantly, the trader can make a considerable profit by exercising their option to buy at a lower strike price.

One thing to note when using this strategy is that it requires an accurate prediction of the market trend. If the price of the underlying asset does not increase or even decrease, the trader can lose their investment. Therefore, it is essential to conduct thorough research and analysis before executing this strategy.

Long put strategy

The long-put strategy is the opposite of the long-call strategy. Instead of buying a call option, the trader purchases a put option on an underlying asset, expecting its price to decrease. A put option gives the buyer the right, but not the obligation, to sell the underlying asset at a specified price within a certain period. This strategy is beneficial when there is uncertainty in the market, and investors anticipate a downturn. In such situations, purchasing a put option can help protect their investment by allowing them to sell the underlying asset at a higher strike price. You can use this strategy to trade FX options online.

However, this strategy also comes with risks. If the market trend does not align with the prediction, the trader may lose the premium paid for the option. Therefore, it is crucial to have a well-informed and researched forecast before executing this strategy.

Covered call strategy

The covered call strategy is a conservative options trading strategy that involves buying an underlying asset while simultaneously selling a call option on the same asset. This strategy allows traders to generate stock income by collecting premiums from selling the call option. If the price of the underlying asset does not increase and remains stagnant, the trader can still make a profit from the premiums collected.

However, this strategy has some limitations. If the price of the underlying asset increases significantly, the trader’s profits will be limited to the strike price of the call option sold. If the stock price decreases drastically, it can result in significant losses for the investor. Therefore, this strategy is more suitable for investors looking to generate stock income rather than capital gains.

Bull call spread strategy

The bull call spread strategy is a limited-risk options trading strategy that involves buying a call option on an underlying asset while simultaneously selling a call option at a higher strike price. This strategy is beneficial when the investor anticipates a moderate increase in the underlying asset’s price. In this case, the profit potential is limited to the difference between the two strike prices, while the risk is capped at the premium paid for both options.

One thing to note with this strategy is that it requires careful monitoring and adjustments as the market trend changes. If the price of the underlying asset does not increase as predicted, the trader may end up losing their investment. Therefore, it is essential to have a well-defined entry and exit strategy when using this strategy.

Bear put spread strategy

The bear put spread strategy is the opposite of the bull call spread strategy, where the investor buys a put option on an underlying asset while simultaneously selling a put option at a lower strike price. This strategy is suitable for investors who anticipate a moderate decrease in the asset’s price. Like the bull call spread, this strategy limits risk and profit potential.

One limitation of this strategy is that it requires precise timing to be profitable. If the market trend does not align with the prediction, the investor may lose their investment. Therefore, it is crucial to have a well-defined entry and exit strategy when using this strategy.