Financial markets have multiple financial instruments that individuals can trade to diversify their portfolios and generate income. Trading options have become increasingly popular in the past few years. Due to its derivative nature, Options work as a hedge investment, and traders can maximize their gains and minimize their risks by taking advantage of this core nature. Options trading seems overwhelming to many individuals, but once a person gets the hang of the simple trading strategies, it not only becomes exciting but can generate consistent returns, provided it is coupled with logical calculations.

The more a trader dives into it and understands its nuances, the higher the chances of consistent returns. The key to successful options trading is understanding the mechanism in which this market works and applying the appropriate strategies to derive the maximum benefit with the minimum risk associated with it. 

In this article, let’s take a look at some of the most straightforward yet most rewarding options trading strategies that can generate prosperous returns for traders:

Covered Call

Covered Call is one of the most implemented strategies in the Options Trading market. It helps the trader to protect themselves against the risk of a long position. Under a covered call strategy, the trader follows two steps: Buying shares of a stock and selling call options for the same stock. In this case, by selling the call options, the trader can receive the premium from the person who buys the call options. If the stock price is below the strike price until the expiration date, then the buyer of call options will lapse his right to exercise the option, and the trader will enjoy the premium as his profit. In another scenario, even if the strike price is lower than the current stock price and the buyer of call options exercises his right, the trader will still profit. Still, the profit will be capped at the strike price along with the option premium. 

For example, Mike owns 50 shares of ABC Co. with a current market price of $40 per share. The trader sells one call option to Lewis with a strike price of $45, an option premium of $2 per share, and an expiration date of one month. The premium received by Mike is $100 ($2*50 shares). 

If the share price of ABC Co. remains below $45 until the expiration date, Mike will not exercise the call option, and the premium received by him, i.e., $100, will be his profit. If the share price of ABC Co. exceeds $45 until the expiration date, Lewis will exercise the option, and Mike will have to sell the 50 shares @ $45 per share. In this case, the total earnings that Mike would take home would be $45 per share, i.e., the strike price and the $2 option premium he received. 

For this reason, covered calls are considered one of the best options trading strategies, which helps the trader generate a good amount of income.

Straddle Strategy

The straddle strategy is one of the most common options trading strategies for highly volatile stocks. This options strategy entails buying both a call and a put option with the same strike price and expiration date. This approach is used when a trader anticipates considerable price volatility in an underlying asset but needs to be made aware of the direction of the price movement. 

For example, a stock is trading at $200 currently, and a trader anticipates a high price volatility due to a financial report release. The trader would buy a $200 call option and a $200 put option with an expiry date after one month. If the price goes above $200, the call option will give profits to the trader, and in case it drops dramatically below $200, the put option will reap profits. Though the profit associated with implementing a straddle strategy can be unlimited if there is a considerable price swing in either direction, the risk remains limited to the combined premium paid for buying both calls and put options.

Thus, a straddle strategy is an excellent approach to implement in highly volatile stocks, as it will benefit the trader regardless of the direction of the price movement. 

Iron Condor Strategy

Unlike the straddle strategy, the Iron Condor strategy is most suitable for stocks that tend to remain within a specific price range and experience less volatility. In this strategy, the trader assumes both long and short positions simultaneously by buying a call and a put option and selling a call and a put option of the same underlying stock for the same expiration date.

Let’s assume that a stock is trading currently at $100, and Mike anticipates that it will remain between $95 and $105 over the next month due to less volatility. In such a scenario, Mike sells a $105 call option and buys a $110 call option, creating a call spread. Simultaneously, he sells a $95 put option and buys a $90 put option, creating a put spread. By doing these four actions simultaneously, Mike enters the iron condor position. In such a trading mechanism, if the stock price stays within the anticipated range, the trader can earn profits through premiums received by selling the options. 

Dividend Capture Strategy

Dividend capture is a strategy that requires employing options to profit on a stock’s expected dividend payments. Traders seek to take advantage of the dividend while lowering the impact of the stock price’s swings. A trader who anticipates dividends being announced on a stock would buy the shares before a stock's ex-dividend date (the day by which it must be owned to receive the dividend) and concurrently sell call options on those shares. Call options are usually slightly out of the money to limit the danger of the shares being called away. The investor receives the premium from selling the call options, which reduces the cost basis of owning the shares. 

After earning the dividend, the trader can close out the position by purchasing back the unexercised call options or allowing them to expire worthless. This straightforward and effective strategy must be used with proper judgment and in-depth analysis of diverse stock dividend releases.

Cash Secured Put Strategy

This strategy doesn’t often hog the limelight, but it is one of the most powerful strategies that can work in absolute favor of options traders. It can help traders earn income while allowing them to own stocks at a discounted price. 

Let’s understand this from Mike's scenario. Mike is interested in buying XYZ Corp. shares, which are currently trading at $50 per share. Mike decides to sell one put option with a strike price of $45 per share, an expiration date after one month and receives a premium of $2 per share. If the current share price remains above the strike price by the expiration date, the option will expire, and Mike will earn the premium as his profit. Alternatively, if the stock price goes below the strike price, Mike can buy the stock at the strike price. Since he had already received the premium, his effective purchase cost per share would be much lower. 

This strategy is most effective when the trader wants to acquire the stocks at a price lower than the current market price. 

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