The Lucrative Options Trading Strategy

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There are different ASX options trading strategies available today, but which one should you choose in order to yield a decent profit? If you search on the internet and go through different investing forums, you will find plenty of options trading opinions that can confuse even the moderate investors. Some investors employ academic approach and analyse profitability and risk from that perspective, while others employ a more adaptable approach. One thing is for sure, however — the main reason why investors prefer options trading is that they want to earn better profits than they can through any other stock trading strategy. With the crazy swings of the Australian Share Market over the past few years, most traders and investors have started to realize the absurdity of simple strategies like “buy and hold”, and have been looking for reliable, profit-generating trading tactics.The Lucrative Options Trading Strategy

Is options trading lucrative?

Some investing forums will give you an impression that options trading in Australia is dangerous and risky. The fact is, any sort of trading is risky, but look at the magnitude of profit that options trading in Australia offers. In contrast to any other investment option, options trading yields exceptional returns. With a very small capital, you have the leverage to control big blocks of share, through which you can reap excellent profits whenever the market moves in the right direction. The disadvantage is that the same leverage also has the capability to erase your portfolio if the options trading strategy you are using does not address certain risk factors. Therefore, the answer to the simple question above is, yes. Trading option in Australia is lucrative, but in some circumstances, it can also be risky.

Is there any options trading strategy that can yield consistent profits?

Novice traders are often introduced to the simple ideas of buying call and put options. While this strategy is easy to understand and put to work, the truth is, in order to make it successful, you need to gain some skills for technical analysis that allow you to predict at least the direction and magnitude of the market swing. This simple strategy indeed provides the greatest potential for a huge profit, but in reality, such potential is not regularly achieved. Therefore, while the simple “buying call and put options” method has an excellent potential for a good profit, it is challenging to attain such potential on a regular basis.

Selling put options

Studies have shown that the most excellent options trading strategy, which can yield excellent profit on a consistent basis, involve not buying call options, but selling put options. Selling put options or selling credit spreads (suitable for those with lower margin limits), had proved to be more lucrative over the long run than any other options trading strategy. While the magnitude of profit is small than other options trading strategies, the consistency of making profit makes it the best strategy. Another excellent advantage of this strategy is that the technical analysis necessities for selling put options or credit spreads is not as tough as that required for other options trading strategies. The risks associated with this strategy are also less. With a solid trading plan, which includes an exit strategy, selling put options can yield more profit with less risk than any other trading strategy.

If you want to venture into ASX options trading, you will need study and understand different strategies and then develop a robust plan that can help yield consistent profit and at the same time minimise your risk. At Total Options, we provide Australian option education that can help you understand how options trading in Australia works. We even provide excellent ASX options advice that can help you yield consistent good returns with minimised risks. In order to know more about Total Options, visit www.totaloptions.com.au

Option Basics

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All stories should start at the beginning, so the option basics you should begin with are the definitions of terms that pervade all options trading.

Option Definition – An option is a right, but not an obligation, to buy or sell and underlying asset at a specific price and on or by a stated expiration date.

Call Option – A call options is the right, but not the obligation, to purchase an underlying futures contract at a specified price at a specified time.

Put Option – A put option is the right, but not the obligation, to sell an underlying futures contract at a specified price at a specified time.

Option Premium – The premium is the price you pay for the option. It represents the maximum risk you experience when you don’t exercise the option.

Strike Price – The predetermined price in the options contract at which the underlying asset is bought or sold.

At the Money –  An option is at the money when the strike price is close or equal to the current futures price.

In the Money – An option is in the money when the strike price is less than the market price of the underlying security.

Out of the Money –  The call option is out of the money when the strike price is higher than the market price of the underlying security. Puts are out of the money if the strike price is less than the market price of the underlying security.

Delta – A measure of the effect of change in the price of the underlying asset on the option’s premium. It represents the amount of the change in the price of an option for each move in the price of the underlying asset equal to one point.

Volatility – A measure of how fast and by how much prices of the underlying asset change. It is a measure of the rate of price fluctuations.

Bought Strangles – Strategy Risks

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The main risk to the bought strangle strategy is the same risk that bought options have. The risks are time decay, volatility decreasing and the share price not moving. The main risk is the share price not moving and the share price expiring between the bought call and put strike prices. If the share price does not move time decay will reduce the value of the bought strangle. Time decay works against the bought strangle as there are two bought option positions. Also if the share price has not moved volatility would have decreased. When volatility decreases the option values decrease and the bought strangle will lose value.

A risk of trading strangles with fundamental factors can be high. The main risk to be aware of is volatility. When share have trading announcements the volatility is often high before the announcement due to the uncertainty and decrease after the announcement. This can mean even if the share price moves the options values may not of increase in value due to the decrease in option volatility.

To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 07 5504 2244 or info@totaloptions.com.au

Bought Strangles: Options Pay-off

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A bought strangle is made up of a bought call option and a bought put option. Combine these two trades together and if there is a different exercise price you have a strangle. A bought strangle options pay-off is demonstrated below.

Bought Call Bought Put
Bought Strangle


To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bought Strangle Psychology

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There is a time and a place for bought straddles and strangles. Ideal market conditions are when volatility is low and expected to increase. The bought strangle is a non-directional trade with the share price able to move upwards or downwards to profit in this strategy.

The idea with bought strangles is to identify a large share price move. This share price move can be either an increase or decrease in share price. To identify these moves you can look at technical analysis and fundamental analysis. Technical analysis tried to identify a break out pattern, while the fundamental analysis indentifies a particular announcement that may cause a large move in share price.


To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Disadvantages of Bought Strangle

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  • It is possible to lose more money if the stays still or within the breakeven range than if you simply bought a call or put option.
  • If the share price rises above the strike price or falls below the strike price but remains below the upper break even or above the lower break even you will still incur a loss on the position.
  • If volatility falls for both or either option, the position could lose with or without a move in share price.


To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Advantages of Bought Strangle

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  • It is possible to profit no matter if the share price goes up or down.
  • A strangle has a lower net debit than the bought straddle.
  • A higher profit in percentage terms than a straddle on the same move in the underlying stock, provided that breakeven point has been exceeded.
  • Since both options are out-of-the-money, time decay on the options is not as rapid as they are with the bought straddle.
  • Unlimited profit if the underlying asset continues to move in one direction.
  • Since the trade is non-directional your outlook can be wrong and still profit from this strategy.
  • The maximum loss is limited to the debit paid.
  • If volatility is low at the time of purchase and volatility rises, both options could profit even without an appreciable change in the stock price.
  • Smaller capital outlay to trade strangles than trading the underlying shares.


To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bought Strangle – Max Profit – Max Loss – Breakeven

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Maximum Profit

Profit is attained when the share price increases or decreases substantially past the break even points. The maximum profit of a strangle is unlimited.

Maximum Loss

The maximum loss is possible if the share price is between the strike prices of the bought call and put option at expiry. This means both the call and the put would expire worthless and the maximum loss would occur. The probability of the maximum loss depends the distance between the strike price of the call option and put option. The closer the exercise prices are the less likely there will be a maximum loss as one of the options should be in-the-money and have intrinsic value. If the exercise prices are further apart time decay will be a major factor and maximum loss is possible.

The maximum loss for a bought strangle or straddle is limited to the net debit paid. The net debit paid is the premium paid for the call options and the premium paid for the put option. Therefore it is possible to lose your initial investment but no more.

Break Even

There are 2 break even points to a straddle. One breakeven point if the underlying asset goes up this is called the upper breakeven point. The other breakeven point if the underlying asset goes down which is the lower breakeven point.

Upper Breakeven Point: Strike Price + Net Debit Paid

Lower Breakeven Point: Strike Price – Net Debit Paid

To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

The Bought Strangle Strategy

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The bought strangle, is a volatile option trading strategy that profits when the stock goes up or down strongly. The Strangle is a similar to the bought straddle. The strangle is in essence a technique used to place a straddle at a cheaper price. The strangle requires a lower debit amount to put on and works exactly like a straddle. One should use a strangle when one is confident of a move in the underlying asset but is uncertain as to which direction it may be. These uncertain moves can be identified through both fundamental and technical analysis.

Establishing a strangle simply involves the simultaneous purchase of an out-of-the-money call option and an out-of-the-money put option on the underlying asset. An out-of-the-money call option allows you unlimited profit to upside when the stock moves higher than the strike price with limited loss to down side. An out-of-the-money put option allows you unlimited profit to downside when the underlying stock moves lower than the strike price with limited loss to upside. Combine them both and you will have a strangle which profits when the underlying stock moves up or down beyond the strike price of the respective options. As the out-of-the-money options in a strangle is cheaper than the at-the-money options in a straddle, a strangle is sometimes described as a “cheap straddle”.

Author: Matthew Gartrell

To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bought Strangles

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The e-book will have detailed information about the bought strangle strategy. This is because this is the most common strategy and the strategy that I find most profitable. The bought straddle is very similar and references to the strategy will be made throughout the e-book. The sold straddle and strangle are great strategies but have much higher risks, therefore is you would like more information please contact me directly.

To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au