Options trading has become increasingly popular among UAE traders in recent years. Options are a form of derivative which allow investors to trade contracts that give the right, but not the obligation, to buy or sell an underlying asset at a predetermined price. Experienced traders can make their investments more profitable and minimise risk by employing options trading techniques.
This article will discuss essential techniques to help you maximise the potential of your options trades while minimising loss.
Leverage
Applying leverage allows experienced traders to potentially maximise investment returns without committing large amounts of capital upfront. Using leverage, investors can increase their exposure and earn greater profits on smaller initial trades than buying stocks outright. However, it is essential to understand that leverage also increases the risk of loss, mainly if trading goes against your positions.
Exercising caution and managing risks by setting stop-loss orders and employing sound position-sizing strategies is essential. Additionally, utilising the services of a reputable broker with low-margin requirements and competitive fees will help reduce potential risks.
Spreads
One of the most popular options trading techniques is spreads. It involves creating a spread by buying one option and simultaneously selling another on the same underlying asset with the same expiration date.
This strategy reduces risk as the trades cancel each other out over time. Income is generated from a difference between premiums collected for writing the short option and paid for purchasing the long one.
Experienced traders can use various spread strategies depending on their goals and market conditions. Moreover, spreads can be used for hedging, making it a versatile and popular options trading technique.
Covered calls
Covered calls are an options trading strategy that involves buying or owning an underlying stock and then writing or selling call options against the stock to generate additional income. It is a conservative strategy for traders who own stocks and seek ways to increase their returns without taking too much risk. The key to success with this technique is effectively selecting the optimal strike price and expiration date of the options contract.
Additionally, experienced traders can use covered calls to reduce the potential downside risk of their existing stock portfolio. Moreover, it can help protect traders’ profits in a rising market and provide an income when the stock moves sideways or falls.
Straddles
A straddle is when you buy or sell a call and put option at the same strike price and expiration date, creating what’s known as a strangle.
This strategy is used by traders who expect large price movements but are unsure in which direction the price will move. Straddles allow the trader to benefit from rising or falling markets and can take advantage of stock volatility, potentially maximising returns when the stock’s market movement is more significant than expected.
Traders should be aware that this strategy carries more risk than other options trading techniques due to its high cost of entry and unlimited potential downside risk.
Protective collar
The protective collar technique helps investors minimise losses while benefiting from potential gains on their investments. One way to do it is to purchase a put option at a strike price below the current stock price while also selling a call option at a strike price above the current stock price.
This strategy creates a protective envelope around your stock, allowing investors to enjoy upside gains while limiting losses. Additionally, it presents an opportunity for more experienced traders to benefit from options premiums by taking advantage of the net credit generated when initiating the trade.
Collars
The collar combines a put and call option that works similarly to protective collars but without requiring any out-of-pocket costs. The critical difference between protective collars and collars is that the latter involves selling calls against existing long stocks at no cost upfront.
By doing so, investors can benefit from upside gains and downside protection on their stock positions. Experienced UAE traders should consider the potential risks of this strategy, such as time decay and increased volatility, before investing in this options trading technique.
Furthermore, traders should adjust their strategies as the market conditions change to obtain maximum potential returns.