This module will focus on some basic strategies to use in bull markets – when prices rise – and in bear markets – where prices fall. By the end of this module, you should have a clear understanding of how to use options to plan for both up and down markets.
Bellow I expose the strategies that are used to speculate or protect themselves from movements in the price of underlying assets:
- Buying call options: This gives the buyer the right to purchase an asset at a specific price (strike price) before the expiration date. It is used when the investor expects the asset’s price to rise.
- Buying put options: This grants the buyer the right to sell an asset at a specific price before the contract expires. It is ideal when anticipating a decline in the asset’s price.
- Writing call options: The seller of a call option receives a premium in exchange for taking on the risk that the asset price will rise. If the price does not exceed the strike price, the seller benefits from the premium received.
- Writing put options: The seller of a put option profits if the price of the underlying asset does not fall below the strike price. The profit comes from the premium received.
- Combined strategies: These involve buying and selling options simultaneously to minimize risks or maximize profits, such as spreads and straddles (positions on the same asset with both calls and puts).
Each strategy will depend on the risk profile and expectations of the investor.
(IBKR, 2023, BASIC OPTION STRATEGIES OVERVIEW, https://ibkrcampus.com/trading-lessons/basic-option-strategies-overview/ )