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There are various options trading strategies that experienced investors use to attempt to profit from the financial markets including:
One of the popular options trading strategies, a straddle involves an investor holding both a call and put option on an asset, with the same strike price and expiration date, while paying both premiums. This is usually used by investors when a significant market movement is expected, but the direction of the movement is unclear. Adopting a straddle options strategy allows an investor to profit regardless of the direction the market moves in, as long as the price movement is large enough to move past either of the strike prices and cover the cost of the two premiums.
A strangle strategy involves an investor holding both a call and put option on an asset, with the same exercise date but using different strike prices. Similar to a straddle strategy, this is best used when a significant market movement is expected. Although the direction of the movement may not be 100% clear, there may be a hint as to where the price will move, which is why a strangle strategy uses different strike prices. This would allow an investor to profit from the impending market movement and would be cheaper than using a straddle strategy, while still providing some protection in case the price was to move the other way.
Another of the popular options trading strategies, a bull call spread involves buying a call option on an asset at a specific strike price, while concurrently selling a call option on the same asset, with the same exercise date, but at a higher strike price. The bull call spread strategy is used when an investor expects a small rise in the price of the instrument being traded. The maximum profit for such a move is calculated by finding the difference between the strike prices and subtracting the cost of the options.
A bear call spread strategy involves buying a call option on an asset at a specific strike price, while concurrently selling a call option on the same asset, with the same exercise date, but at a lower strike price. This strategy is adopted when a trader expects the price of an asset to fall moderately. Like the bull call spread strategy, the maximum profit is calculated by finding the difference between the strike prices and subtracting the cost of the options.
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