Traders use several different strategies when they invest in the UK. Some people like to buy and hold their investments for a longer term, while others prefer to invest over a shorter period (like an hour) and take more risks with their trades. Fortunately, there are many different options trading strategies you could try out so you can find one or more suitable ones for yourself.
Using option spreads allows you to limit your risk but still profit from your investment if it goes up in value without waiting for such a long period before making your profit. This particular strategy consists of buying two options – one which gives you the right to buy specific security, and another option which is a “put” option.
For example, if you think a company’s share price will drop in value below a certain point within a week, you would buy the put option giving you the right to sell it at that price. This limits your losses from your initial purchase of shares by capping their maximum possible loss at the cost of buying the puts.
If, instead of predicting that a stock or commodity will lose its value, you predict that it will gain in value over time (e.g. an hour), then this strategy might be for you. Take Apple Inc as an example, and their shares have been going up in value throughout the last nine months, with a big spike when iPhones were announced. Call-Back spreads are a way of taking advantage of this and is also called “buying butterflies”.
This strategy consists of buying two call options – one which gives you the right to buy specific security at a certain price within a given period, and another option is a “call” option. For example, if Apple stock rises above £125 in one week, you could sell it for that amount. Unfortunately, it means you lose out on some potential profits because your initial investment cost was higher than its current selling price (a loss), but at least you know you won’t lose any more than what you paid to purchase the options.
It is similar to call-back spreads, but instead of buying options for both calls and puts, you only buy the stock’s rights but do not sell it. If Apple went up in value after their iPhone announcements, you would make some quick profits with this strategy because you will have bought the correct option, which gives you the right to purchase shares at a specific price within a certain period.
Like Call-Back spreads, this limits your losses to what you paid for purchasing the options (minus any potential dividends), even if Apple’s share price didn’t increase or decrease in value during that time frame. Unfortunately, it takes more effort and is riskier because you are hoping to make profits on an increase in share price (while hoping they don’t decrease) without the benefit of selling your stocks at a fixed price if they do increase their value.
It is simple, instead of buying the rights to sell the shares, you buy the rights to purchase them and hope that the price drops below what you paid for them by a specific date. If it doesn’t, you will still lose out on some potential profit because your initial investment was higher than its current selling price. Similar as if using a call spread only with puts rather than calls.
So, what’s the best options trading strategy in the UK? Unfortunately, it’s not that simple because there are so many options to choose from, and they all give different results for varying degrees of risk. The best option is to try out each strategy individually until you find the one which fits your needs. New investors are advised to use the services of a reputable online broker such as Saxo Bank and trade on a demo account before investing real money.