Options strategy

Options strategies allow traders to profit from movements in the underlying assets based on market sentiment (i.e., bullish, bearish or neutral).

Traders can also profit off time decay, measured by the uppercase Greek letter theta (Θ), when the stock market has low volatility.

They can also use Theta (time decay) with a bullish/bearish combo called a Calendar Spread, when sideways movement is expected.

The trader may also forecast how high the stock price may go and the time frame in which the rally may occur in order to select the optimum trading strategy for buying a bullish option.

While maximum profit is capped for some of these strategies, they usually cost less to employ for a given nominal amount of exposure.

It is necessary to assess how low the stock price can go and the time frame in which the decline will happen in order to select the optimum trading strategy.

Moderately bearish options traders usually set a target price for the expected decline and utilize bear spreads to reduce cost.

Also known as non-directional strategies, they are so named because the potential to profit does not depend on whether the underlying price will increase or decrease.

Rather, the correct neutral strategy to employ depends on the expected volatility of the underlying stock price.

Neutral trading strategies that are bearish on volatility profit when the underlying stock price experiences little or no movement.

[6] A spread position is entered by buying and selling options of the same class on the same underlying security but with different strike prices or expiration dates.

For this reason, a box is sometimes considered a "pure interest rate play" because buying one basically constitutes lending some money to the counterparty until exercise.

[citation needed] Box spreads expose investors to low-probability, extremely-high severity risk: if the options are exercised early, they can incur a loss much greater than the expected gain.

An option strategy profit / loss graph shows the dependence of the profit / loss on an option strategy at different base asset price levels and at different moments in time.