Options trading is buying and selling options contracts to make a profit. Options are derivative securities, meaning their price is derived from the price of another asset. The most common underlying asset for options contracts is stocks.
Options trading can be a complex and risky endeavour, which is why many professional traders use specific techniques to help them manage their risk and maximise their chances of success.
Here are five options trading techniques that professional traders use in Hong Kong down below. Learn more about options trading techniques here.
1. Covered Calls
Covered calls are options trading strategies used by Hong Kong traders where you sell call options on a stock you own. By selling the call option, you agree to give the buyer the right to purchase your stock at a set price (the strike price) on or before a specific date (the expiration date).
The benefit of selling covered calls is that you can generate additional income from your existing stock portfolio. The downside is that you may miss out on potential profits if the stock price rises above the strike price.
2. Put Selling
Put selling is an options strategy where you sell and put options on a stock you believe will increase in value, and by selling the put option, you agree to give the buyer the right to sell you the stock at a set price on or before a specific date.
The benefit of selling puts is that you can generate income from stocks that you believe will go up in value, but on the other hand, you may have to purchase the stock at the strike price if the stock price falls below that level.
3. Bull Put Spreads
A bull put spread is a type of options trading strategy where you buy and sell put options on a stock you believe will increase in value. The difference between the strike prices is the maximum profit you can make from the trade.
The benefit of this options trading strategy is that it limits your downside risk while still allowing you to participate in any upside potential. The downside is that your potential profits are limited as well.
4. Bear Call Spreads
A bear call spread is an options trading strategy where you buy and sell call options on a stock you believe will go down in value. The difference between the strike prices is the maximum profit you can make from the trade.
The benefit of this options trading strategy is that it limits your downside risk while still allowing you to participate in any upside potential. The downside is that your potential profits are limited as well.
5. Iron Condors
An iron condor is an options strategy where you simultaneously buy and sell call options and put options with different strike prices. This trade is considered neutral because you are delta neutral, meaning your position is not affected by small changes in the stock price.
The benefit of this options trading strategy is that it allows you to profit from stock trading within a specific range, but the risk is that you may have to take a loss if the stock price moves significantly in either direction.
What are the risks of using these strategies?
The risks of using these strategies vary depending on the specific strategy. For example, covered calls involve selling call options, which can increase your downside risk if the stock price falls below the strike price. Put Selling involves selling put options, which can increase your downside risk if the stock price falls below the strike price.
Bull put spreads, and bear call spreads limit your downside risk and your upside potential. Iron condors involve buying and selling call options and put options, which can increase your risk if the stock price moves significantly in either direction.
Finally
Options trading can be complex and risky, but there are ways to minimise those risks. Professional traders use specific options trading techniques that help them manage their risk and maximise their chances of success. By using these strategies, you can increase your chances of making a profit from your options trades. For more information on using options trading techniques, get it here.
