Options trading can be an attractive way to potentially make money in the stock market, providing traders with the potential for significant profits with limited risk. As such, it is becoming increasingly popular among investors in the UAE.
However, as with any trading, various options strategies should be considered when entering this market. These strategies can help traders potentially maximise their profits while minimising their risks. This article will discuss strategies that may help traders succeed when options trading in the UAE.
Use long and short call options to profit from positive price movement
Long and short call options are one of the most popular and frequently used strategies in options trading. The strategy involves buying a call option with a strike price lower than the current market price (long call) or selling a call option with a strike price higher than the current market price (short call). It allows traders to profit from positive price movement in the underlying asset, whether stocks, commodities, indexes, or currencies.
Traders must consider each trade’s risk and reward potential when using this strategy. By combining long and short calls at different strike prices, traders can potentially maximise their profits and minimise their losses. Additionally, when entering long calls, traders should pay attention to volatility levels, as high volatility may lead to a significant loss should the price move in an unexpected direction.
Use straddles and strangles to benefit from both volatile markets and range-bound markets
Using a straddle or strangle strategy is another popular options trading strategy that can be used to benefit from either volatile markets or range-bound markets. A straddle is when traders simultaneously buy a call option with one strike price and a put option with the same strike price. Traders can profit regardless of the market direction if there is significant enough movement for both options to be profitable.
Alternatively, a strangle involves simultaneously buying both a call and put option with different strike prices, usually one higher and one lower than the current market price. Strangles are used when traders expect the market to stay within a specific range and can benefit from both volatility and range-bound markets.
Use butterflies to profit from slight movements
The butterfly options trading strategy is similar to both straddles and strangles but involves buying three call or three put options at different strike prices. It allows traders to benefit from mild price movements that would otherwise not be profitable using other strategies.
The butterfly strategy can be used when traders expect the market to stay within a specific range but still want to benefit from minor price movements. When entering butterflies, traders should consider their risk and reward potential before executing the trade.
Use collars to protect profits while still profiting from positive price movement
The collar options trading strategy is used when traders want to protect their profits while benefiting from a positive price movement when trading options online. To do so, they buy one call and one put option with the same strike price and then use the proceeds of the short call sale to purchase additional shares of the underlying asset. It creates a “collar” around their initial investment, allowing them to reap some benefits of a positive price movement without risking all their capital.
When entering this trade, traders must consider whether it will be profitable at the expiration and pay attention to volatility levels.
Use calendar spreads to benefit from time decay
Calendar spreads are popular options trading strategies used to benefit from time decay, also known as theta. This strategy involves simultaneously buying and selling two different option contracts with the same underlying asset but different expiration dates. This strategy aims to take advantage of the difference in time value between the two options so that when one option expires, its value will be less than the other option’s value, resulting in a profit for the trader.
When entering this trade, traders should consider each option’s risk, reward potential, and current market outlook. They should consider any event risks impacting price movement and volatility levels.