There are a variety of popular options trading strategies in the UK that traders can use to make money. Let’s take a look at 10 of the most popular options trading strategies:
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1. Straddle
A straddle is one of the most popular options trading strategies in the UK. It involves buying a call option and a put option simultaneously, hoping that the price of the asset will move significantly in either direction. If the price moves in the desired direction, the trader can profit by selling the options they bought at a higher price than they paid for them. If the price does not move as expected, the trader can still hold on to their options and wait for better opportunities.
2. Covered call
A covered call is another popular option trading strategy in the UK. This strategy involves writing a call option against an existing holding of the underlying asset.
The buyer of the call option wants the underlying asset’s price to increase and pays a premium for this. The writer of the covered call collects that premium. If the underlying asset does not rise significantly in value, they write another call option (on the same purchase) and collect another premium.
3. Protective put
A protective put is one popular option trading strategy in the UK. It involves buying an out-of-the-money put option on an existing holding to protect against significant downside risk and potential loss of capital if new information comes to light about that holding which would cause it to decrease significantly in value. For example, if you hold 100 shares in company X and are currently trading at £20per share, I can protect against significant downside risk by buying a put option that costs me £1 per share. This protects you from potential capital loss if its trading results are not as good as expected and its price falls to £15 or lower.
4. Naked put
A naked put is another popular option trading strategy in the UK that uses a write rather than a buy position. The naked put involves writing an out-of-the-money put on a stock already held by the trader, hoping that it will expire worthless and keep the entire premium paid by the buyer for selling it. However, significant losses can be taken if it does not pass worthlessly since there is no underlying holding to offset the cost.
5. Bull spread
A bull spread is a popular options trading strategy in the UK that uses call options to take advantage of a rise in the underlying asset price. It involves buying a call option with a lower strike price and selling a call option with a higher strike price. This strategy profits if the underlying asset rises in price, as the call option with the higher strike price will be more expensive than the one with the lower strike price.
6. Bear spread
A bear spread is another popular option trading strategy in the UK that uses put options to take advantage of a fall in the underlying asset price. It involves buying a put option with a higher strike price and selling it with a lower strike price. This strategy profits if the underlying asset falls in price, as the put option with the higher strike price will be more expensive than the one with the lower strike price.
7. Butterfly spread
A butterfly spread is a popular options trading strategy in the UK that uses both call and put options to take advantage of a rise or fall in the underlying asset’s price. It involves buying one at-the-money call option, selling two out-of-the-money call options, and buying one at-the-money put option. This strategy profits if the underlying asset moves significantly in either direction.
8. Iron condor
An iron condor is a popular options trading strategy in the UK that uses a combination of call and put options to take advantage of a range in the underlying asset price. It involves buying one at-the-money call option, selling two out-of-the-money call options, and buying one at-the-money put option. This strategy profits if the underlying asset stays within a specific range, as all options will expire worthless except for the ones in the money.
In conclusion
If you’re a new trader and have not actually traded options it is advisable to practice using a demo trading account from a reputable brokerage.