FX options trading is more complicated than trading stocks. However, it is a good strategy for people who want to limit their risks as traders. You can use various strategies, which range from the very basic strategies to the complicated ones. Even though there are no exceptionally good options when it comes to trading strategies, a good understanding of the good option trading strategies will help you maximize your returns in the market. To benefit from FX options trading, you have to select options strategies that match your personality. And to help you do that easily, we have come up with a list of the strategies you should try. Here they are.
The covered call
With calls, your one strategy should involve buying naked call options. Still, you will have the option of structuring a basic buy-write or covered call. This is among the most popular strategies because it generates more income and minimizes the risks. On the downside, you will have to be willing to sell some or all your shares at a set price, known as the stock strike price. To execute this strategy, you will have to buy your stock, as you would do normally, and write (sell) call option on your shares simultaneously.
For every 100 shares you purchase, you will sell 1 call option simultaneously against it. That is known as the covered call because the long stock position will cover your short call if the value price of the stock rockets. The strategy is suitable if you have a short-term position in a neutral opinion. Your goal might be to protect against probable declines in your stock value or to generate income.
In married put strategies, you will have to buy an asset and put options for the same amount of shares simultaneously. Holders of put options have a right of selling their stocks at the strike price. Every contract has to be equivalent to 100 shares. People use this strategy as a way of protecting the downward risks when holding stock. The strategy is similar to insurance policies, and if the price or value of your stock falls sharply, you will have an established price floor. For example, if you buy 100 shares and 1 put option concurrently, that would be a married put. The strategy will protect you against downsides associated with negative events.
Bull call spread
The bull call spread strategy requires the investor to buy calls at a set strike price and trade the same amount of calls at the same buy at an increased strike price. The FX call options will always have the same inherent asset and expiration. The strategy is suitable when investors are bullish on their underlying assets and expect the asset price to increase moderately. Investors limit the upside of their trades and reduce the net premium they spend compared to purchasing naked call options. The investor waits for the stock price to increase so that they can make profits.
Bear put spread
This strategy and the bear put spread strategy are vertical strategies. The strategy requires you to buy FX put options at set strike prices and simultaneously trade the same amount of puts but at a lower strike price. The two options are for the same asset, and their expiration date is the same. The strategy is applicable when investors are bearish, and they expect the price of his asset to fall.
The strategy offers both limited gains and limited losses. The strategy is bearish, and you will, therefore, have to wait for the price of your stock to fall so that you can earn. If the puts are expensive, you will have to sell strike puts of lesser value against them.
Protective collar strategy will require you to buy out-of-the-money FX put option & then sell “out of the money” FX call option concurrently. The underlying asset and the expiration should remain the same. Investors use this strategy after a very long position in stock experiences substantial gains.
The combination of options allows downside protection and the trade-off of being compelled to sell your stock at a high price. For example, if you are long 100 IBM shares at $50 and the IBM rises to $100, you could protect a protective collar by selling one IBM 105 call and buy one IBM 95 put simultaneously. You will be protected below $95 until the expiration.
The long straddle options strategy requires an investor to buy a call and a put FX option concurrently on an underlying asset with the same date of expiration and strike price. Investors use the strategy if they believe that the underlying price of their asset will move out of range significantly, but they are unsure of the direction the move takes. With this strategy, you will have the opportunity; you will benefit from unlimited gains while the loss is limited to the cost of the combined options contract. The strategy is more profitable if the stock makes a huge move in any direction. Investors do not care about the direction the stock follows.
In this FX options strategy, you will have to buy an “out of the money” call option together with an “out of the money” put option and on the same date of expiration and underlying asset. Investors who choose this strategy experience large movements, but they do not know the direction their move will take. That could be a wager on the release of a company’s earnings or an event that affects a product’s stock. The losses are usually limited to the premium spent on the options. Long strangles is inexpensive compared to straddles because the bought options are usually out-of-the-money.
Long call butterfly
This FX options strategy combines both bar spread strategy and bull spread strategy. It also includes three levels of strike prices. However, the options have one expiration date and inherent asset. A quick example, you can make your long call butterfly spread by buying one-in-the-money call FX option at a lower strike price and then selling two at-the-money FX call options. The wings of a balanced long call butterfly spread are of the same width. The result is usually a net debit. Investors use this strategy if they think that the expiration will not affect the stock.
Regardless of the strategy you choose, you have to understand all the basics of executing FX options trades and how to break even. You should also know the amount of money you are ready to lose, the profits you can make and whether your account is eligible for the strategy you choose. If the contract account offsets the other, the strategy will end up in limited losses.