Options trading is one of the most versatile forms of trading, enabling traders to earn significant returns regardless of market direction.
Simply put, options trading allows traders to gain profits from both rising and falling markets. It may even start with a lower capital requirement.
However, you may be required to carefully plan and strategize in order to mitigate risk and achieve consistent returns.
In this blog, we’ll delve deep into the three best trading strategies for options that can help you gain returns and reduce risk. Let’s begin!
3 Best Options Trading Strategies for Consistent Returns
Here, we’ve mentioned three of the best option trading strategies that may help you gain consistent returns in the options market.
1. Covered Call Strategy
A covered call is considered a safe option trading strategy that enables you to benefit from conservative gains with relatively lower risk.
How does it work?
This strategy involves selling a call option while simultaneously owning the underlying stock.
When the price of the stock goes above the strike price, the buyer may exercise the call option, and you’ll have to sell the stock at the strike price. Here, you’ll receive the premium.
When the strike price stays below the strike price, you may retain the stock and premium for the call option. Here, the buyer’s option expires worthless.
Though this options trading strategy limits the trader’s upside potential, it also reduces the risk of registering unlimited losses. The premium received by selling call options enables traders to offset any losses if the stock price declines.
2. Cash-Secured Put Strategy
The Cash-Secured Put strategy is another options trading strategy ideally suitable for bullish traders looking to enter at a lower price. This strategy allows traders to buy underlying stocks at lower prices and simultaneously earn income from options premiums.
How does it work?
This strategy involves selling a put option while keeping enough cash in the demat account to buy the stock if the price falls below the strike price.
If the stock price goes below the strike price, you will have to purchase the stock at the required price. It is still lower than the market price.
In case the stock price doesn’t fall below the stock price, you earn the premium from selling the put.
The additional cash kept in the account ensures the maintenance of the risk if the stock price doesn’t remain bullish. However, there is always a risk if the market significantly declines.
3. Bull Call Spread
The Bull Call Spread is an ideal trading strategy in cases where you’re expecting a small to moderate increase in asset price. It is considered a cost-effective way to participate in the bullish movement while limiting potential losses.
How does it work?
This options trading strategy enables you to buy a call option at a lower strike price (ATM or slightly OTM) and sell the call option at a higher strike price (further OTM).
In this strategy, you gain the profit as the maximum amount between two strike prices minus the premium paid for buying the call option.
Bull Call Spread is a low-risk reward strategy. Hence, it allows traders to gain profit even in low-volatile markets. The maximum loss is the net premium paid to initiate the spread.
Conclusion
In summary, success in the financial market, especially the options market, depends upon selecting the right trading strategy considering the current market conditions. The three strategies that we’ve mentioned above may help you gain profits in most of the trades. We hope this blog helps you unfold the best options trading strategies for gaining consistent returns.
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