Trading options has brought a completely new and different dimension for traders which not only help them to hedge their portfolio risk but also to earn good return on investments. Previously we have discussed about many different types of options trading strategies however in this blog we will be looking in detail at two of the most profit making strategies:

1.) Straddle: It is a strategy where a particular option is purchased or sold and that allows a trader to earn profits depending upon how far the market price goes from the strike price immaterial of the direction. If one is buying option derivatives it is called long straddle and if one is selling option derivatives it is called short straddle.

1. Long straddle is when a trader purchases both a call and a put option, both the call and put options are bought at the same strike price. Trader would earn handsome returns if the price of the stock moves far away from the strike price, may it be upwards or downwards. If you look at the payoff diagram of long straddle it is a V shaped diagram.
2. Short straddle is when a trader sells both a call and a put option of same underlying asset at a similar strike price and contract end date. In this case the profit is limited to call and put options premium, trader would lose money if the price of the stock moves up and down a lot. This is a risky strategy and the payoff diagram is inverted V shaped.

2.) Option spreads: In this strategy spread position can be employed by purchasing and selling same number of options with similar underlying asset but with different strike price and different contract end dates. Option spreads are divided into three broad categories namely vertical spreads, horizontal spreads and diagonal spread. Vertical spreads includes options of similar underlying asset with similar contract end dates but different strike prices. Horizontal spreads would have similar strike price but different contract end dates for the same underlying asset. Whereas diagonal spreads would have same underlying asset but contracts with different strike prices and contract end dates. Within these options spreads there are different verities like Call and put spreads, Bull and bear spreads, Credit and debit spreads, Ratio spreads and backspreads, Spread combinations and Box spreads.

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