Pushing the limits: advanced strategies for listed options trading

Listed options trading is a popular form of investment in Australia, with many traders looking to maximise their returns. However, it’s essential to understand the fundamentals before venturing into this area of finance. Options trading can be risky and often relies on complex strategies to ensure success.

This article will provide an overview of advanced strategies experienced traders might consider when trading listed options. These strategies have the potential to offer greater returns than more straightforward approaches and help reduce risk while providing more control over the process. It is advised that traders familiarise themselves with all aspects of listed options trading before attempting any of these advanced techniques.

Covered calls

A covered call is a common strategy in which a trader buys an asset and sells a call option on the same asset. It gives the trader a premium, the amount received from selling the option, while protecting them against potential losses if the stock price falls below their purchase price. If the stock rises above the strike price, that of the option they sold, they will continue to benefit from any additional profits.

There are several advantages to using this strategy, including reduced risk and increased control over outcomes. As traders are simultaneously buying and selling, it can be used to generate income without relying solely on speculative investments.

Bull call spread

The bull call spread is a strategy most commonly used during times of high volatility when the outlook for the stock market is bullish. It involves buying a call option with a lower strike price and simultaneously selling a higher strike price call option on the same underlying asset. The trader benefits from any increase in the stock’s value but limits their losses if it falls below the lower strike price.

This technique can help generate income as it requires less capital than other strategies and offers more significant returns than investing in stocks or options alone. As traders control both sides of this trade, they must monitor market changes closely to ensure that profits are not lost through unexpected price movements.

Protective put

The protective put is a strategy against potential losses with options trading in Australia. It involves simultaneously buying an asset and a put option on the same underlying stock, giving traders control over their exposure, and allowing them to limit any losses should the stock price fall below their purchase price.

It can be beneficial as investors can also benefit from any market movements in either direction with this technique. However, it does require more capital than other strategies and can be challenging to implement effectively if not managed correctly. Investors should take note of the expiration date on the put option and any fluctuations in the stock’s price to ensure that they are making informed trading decisions.

Bear put spread

The bear put spread is another advanced strategy suitable for times of heightened volatility when the outlook for the market is bearish. In this approach, a trader buys one put option and simultaneously sells another of a lower strike price on the same underlying asset. The benefit of this strategy is that the trader can make money if the stock’s price falls below either strike price, with losses being limited to the cost of buying the options.

This method also enables traders to take advantage of time decay, which reduces the value of options as they get closer to their expiry date. Considering any potential risks associated with this approach before executing any trades is essential.

Covered combination

The covered combination is an advanced strategy involving two components for a single trade, selling calls and puts at different strike prices on the same underlying stock. It involves taking on long and short positions, which can benefit from market movements in either direction. It is a more complex approach and requires traders to understand the implications of both sides of the trade and any associated costs or risks. The covered combination can deliver higher returns than other strategies but also comes with additional risks that must be considered.

Long straddle

The long straddle is another advanced strategy suitable for times when there could be significant price movements in either direction. In this technique, a trader simultaneously buys a call and put option at the same strike price on the same underlying asset. It gives them control over their exposure to risk while providing opportunities for significant returns if the stock moves in either direction. However, this approach requires more capital than other strategies and needs to be monitored closely due to changing market conditions. Investors should consider any associated risks and know the options’ expiration dates.