Profitable Options Strategies
Traders can use a number of profitable options strategies depending upon their risk tolerance and degree of expertise. Profitable options strategies also depend upon why one is trading options in the first place. Companies that buy and sell products across the world buy options to hedge risk. Currency speculators use a range of profitable options strategies aimed at enhancing profits while limiting loss. First of all let us look at profitable options strategies from the view point of risk limitation.
Options in Foreign Currency Trading
ABC Company in the USA decides to buy machine parts from a company in Germany. They will need to pay in Euros upon delivery six months hence. They are concerned that the price of the Euro will go up versus the dollar before payment is due. This would obviously make their purchase more expensive. They could simply pay right away but would rather have the use of their money for the next six months. ABC Company will choose to buy calls on the Euro for the amount of the contract. If the Euro goes up in price they will execute the contract so that they can buy Euros at the lower contract price and not the subsequently higher spot price. If the Euro does not go up in price they will no need to execute the contract and if the Euro actually falls in price they will save money by waiting. This is one of the profitable options strategies can foreign currency traders can use. It is a sound strategy for hedging risk with options.
Market Speculation with Options
Often times profitable options strategies have to do with speculating in a volatile stock market. Let us say that you are interested in the stock of ABC Company. The stock price has been bouncing up and down in a very volatile market. You believe that the stock is either going to go up substantially or fall precipitously depending upon the success or failure of a buyout attempt by a competitor. In order to profit in either case you use what is called a long straddle options strategy. In this case you buy both a put and a call on ABC Company, both with the same expiration date and for the same strike price. Your cost of this strategy is the price of the two options contracts. You will profit if the stock price rises or falls as you will execute the appropriate contract. If the stock price simply stays put your loss will be limited to the price of the contracts.
Adding a Little Profit to Your Investment Portfolio
Investors who own a given stock can often profit from selling calls on the stock. If you correctly believe that ABC Company is at the top of its current trading range you can sell calls on the stock. You will receive the price of the options contract, like getting an extra dividend. Providing that your judgment is sound you will keep the stock because the price will not rise.