Options trading, without a doubt, can help you make profits and accumulate wealth in the long run. But do all options traders make money? Sadly, the answer is no, and many traders lose money. However, if you follow a good strategy and execute it correctly, you can improve your chances of being successful as a trader and achieving your goals.
In this article, we will discuss the most profitable options strategies to help you start your journey the right way. We will also share some valuable tips to help you do risk management and become a successful trader. So, without any further delay, let’s discuss the top options trading strategies.
Most Profitable Options Strategies
Strip
The strip strategy can help traders make significant profits. Theoretically, the maximum profit is unlimited, and this strategy should be executed when a trader is bearish on the market’s direction and bullish on volatility. The maximum loss in this strategy is equal to the net premium paid.
The strip strategy involves buying one lot of ATM call options and two lots of ATM put options. They should have the same strike price, expiry date, and underlying stock.
Long put
The long put strategy is easy to execute, and beginners can try it too. Traders choose it when they expect a downward movement in the near term.
This strategy involves buying an ATM put option; however, you can also buy ITM or OTM put options. The risk-to-reward ratio will vary, depending upon the option you pick.
In the case of an ATM put option, the maximum profit is undefined if the price moves under the breakeven point. The good thing about this strategy is that the maximum loss is capped and equal to the net premium paid.
Bear put ladder
The bear put ladder strategy can offer good returns, but it also involves high risk, so traders should execute it carefully. It’s a neutral to bearish strategy, and traders use it when they expect the market to be less volatile and are moderately bearish.
The bear put ladder strategy involves buying one ATM or ITM put and selling two lower strike OTM puts at different strike prices. Generally, experienced traders use this strategy because the loss is uncapped when the stock price falls.
Long call
Traders execute the long call strategy when they are bullish on the market direction, and it’s easy to execute, which makes it an ideal option for beginners too. The biggest advantage of this strategy is that it has unlimited profit potential with capped risk. Since it’s easy to execute, the chances of miscalculations are also reduced. The maximum possible loss is equal to the amount of premium paid.
The long call strategy involves buying an ATM, ITM, or OTM call option, and the risk and reward potential are different in all cases.
Bull call spread
The bull call spread is a common and popular option among all spread strategies. Traders combine two options of the same type to generate profits. This strategy involves buying one long call with a lower strike price and selling one short call with a higher strike price. You should ensure that both calls have the same expiration date and the underlying stock.
The traders following this strategy try to generate profits from a gradual price rise. The max profit in a bull call spread is equal to the difference between the two strike prices minus the premium paid.
If the stock price is under the lower strike price at expiration, both calls will expire worthless. The trader will have to bear the maximum loss in such a situation, which will be equal to the cost of the spread, including commissions.
The bull call spread is a limited profit/limited loss strategy, which makes it suitable for beginners too. If your research or some other reliable source suggests an upward movement, executing this strategy can be a good option.
Bull put spread
This strategy is similar to the bull call spread strategy. Individuals use this strategy when they expect an upward price movement. They combine two options of the same type, and they buy one put option with a lower strike price and sell one put option with a higher strike price. Ensure that both puts have the same expiration date.
This strategy is also known as a short put spread. An individual will get the maximum profit on this trade if the stock price finishes above the higher strike price. The maximum loss is also limited in this strategy, and it’s equal to the difference between the two strike prices minus the received premium.
Guts
The guts strategy is used when traders expect a significant movement in a stock's price but are unsure of the direction of the movement. It’s a non-directional strategy and offers a good risk-to-reward ratio, which makes it appealing to traders.
The guts strategy involves buying or selling one lot of ITM call at the same time as an ITM put. Ensure that both have the same expiration date, and the distance should also be equal between the strike price from the ATM.
So, these are the most profitable options strategies you can choose. Since we have discussed a number of strategies, it will be easy for you to find a suitable option. But which strategy among these is the best?
What Is the Best Options Trading Strategy?
All the strategies we have covered in this article are worth trying, as they can help you make a profit in ideal conditions. Since they all have their set of advantages and disadvantages, it would be unfair to declare one better than the other, in general.
Some strategies are easier to execute than others, and beginners usually find them more appealing. On the other hand, some strategies are hard to execute and include more risk but offer a higher profit potential, and some traders find them more appealing.
Since several options are available, you can explore different strategies instead of sticking to one. A strategy that works best for you may not get the same results for another trader. Also, a strategy that helps you in good market conditions may not offer the same kind of results in other economic cycles.
You should pick a strategy depending on your personal preference, goals, market conditions, skills, risk-to-reward ratio, and other important factors. In the following section, we will share some valuable tips for options trading.
Important Tips for Options Traders
Always risk the money you can afford to lose
Doesn’t matter how experienced you are; you aren’t guaranteed to make a profit as a trader. It’s important to understand the involved risks before risking your hard-earned money. Also, you shouldn’t risk more than you can afford to lose.
You shouldn’t even touch your emergency funds when trading. Also, you shouldn’t risk the money you need to pay your bills and buy important stuff. You can start your trading journey with 2%-5% of your funds and stick to it until you gain some experience in the field. This way, even if you lose money, you and your family won’t suffer, and you will be able to take care of your day-to-day needs.
Develop a trading style
You should develop a trading style depending on your skills, personality, and goals. While it can be hard for beginners to find a suitable trading style, you can easily do it as you gain experience. Some individuals prefer positional trading, and some are more comfortable with day trading. The right approach is to explore different trading styles and see what works best for you.
Have discipline
It’s important for options traders to have a solid plan, and they should stick to it under all circumstances. It’s easy to get off track when a few trades don’t go our way, and people often make mistakes in such situations. You should do proper research to identify opportunities, build an exit strategy, and set up the right trade to improve your chances of being successful. You should also be good with numbers to do the required calculations quickly when an opportunity presents itself.
Emotions and personal bias are a trader's biggest enemies. People often blame market conditions and luck for their losses, but lack of discipline is the biggest reason for it.
Have realistic expectations
“I want to become a millionaire overnight!” - If you have such goals, options trading isn’t the right thing for you. You should enter the market with realistic expectations because unrealistic expectations will only lead to disappointment. People who stay consistent and do proper risk management often achieve their long-term goals.
Maintain records and learn from your mistakes
To be a successful options trader, you will have to maintain proper trade records. You should also be an active learner. You should know how much money you made or lost in a day, week, month, and year. This way, it will be easy for you to learn from your mistakes, and you can easily work on your weaknesses. On the other hand, if you are making good profits, you can keep moving on the same track.
Is Options Trading Profitable?
Yes, options trading can be extremely profitable, but you will have to make the right moves to end up on the right side. Being aware of the most profitable options strategies isn’t enough, as you may lose money if the execution isn’t right.
Just like other forms of trading and investing, the risk is involved in options trading as well. However, the right strategy and execution can help a trader/investor make a profit while reducing the risk. But beginners often need a helping hand, and people who can’t invest the required time and effort trading demands can also benefit from an options-picking service.
FoolProof can be a game-changer for such traders. It’s one of the most trustworthy, popular, and reliable traders in the industry, and it’s known for offering quality services. FoolProof analysts have decades of trading experience, and they work hard to help members stay on the right side of the market.
Trading services and benefits
Once you become a member, you can expect three trade alerts per week, and depending on market conditions, you may also receive more than three alerts in some weeks. Members also get a full trade plan and guidance. FoolProof offers excellent customer support, and the official site is also well-designed.
It’s a must-have service for options traders, but if you have any second thoughts about its reliability, you can start a 14-day free trial. Moreover, you will get a 200% money-back guarantee, which is an added benefit. Have a tight budget? Don’t worry, FoolProof offers reasonably-priced services, so you won’t have to worry about your budget.
Conclusion
We hope you found this article helpful and liked our list of the most profitable options strategies. It’s important to understand that none of these strategies is better than the others in general.
One has to analyze the market conditions, do a fundamental analysis, and consider several other factors before choosing a strategy. Also, a strategy will help you get the desired results only if you execute it correctly at the right time. You can lose money even if you do everything the right way, as nobody knows for sure in which direction the market will move. If you follow the tips we have shared above, you can improve your chances of making a profit.