A few years ago, I had the honor of managing a hedge fund with my brother. We used to discuss what options and strategies we should leverage. It’s a known fact that if you buy and hold, you will improve your probability of being profitable.

However, if you are a hedge fund, you wish to use some options strategies to boost your profit when the market is going up, down, or sideways.

Options strategies can be an effective tool for investors looking to increase their return on investment. Many strategies have the potential for significant gains, but the plan with tremendous profit potential is often considered a long-call option.

A long call option is a strategy where an investor buys the right to buy a stock at a specific price (strike price) at a specific time (expiration date). If the stock price rises above the strike price, the investor can exercise the option and purchase the stock at the lower strike price, resulting in a profit. The potential gain is theoretically unlimited, as the stock price could continue to rise indefinitely. However, it should be noted that this strategy also carries a significant risk, as the potential loss is theoretically unlimited if the stock price falls below the strike price. We discovered that you wish to buy these Calls of companies you believe in, but the current price is volatile. In those cases, you risk less money (the Calls are cheaper than the stocks) but keep the potential for future gains.

Other option strategies include writing covered calls, spread trading, and buying or selling puts.

Let’s see when you should think about each strategy.

When should you use covered calls?

Covered calls are best used when an investor anticipates that the underlying asset price will remain roughly the same but still wants to make some money. The investor will sell a call option on the underlying asset, setting a strike price higher than the current market price. If the stock price remains below the strike price, the investor will keep the premium from selling the call option. If the stock price rises above the strike price, the investor will have to sell their stock at the strike price but still, keep the premium.

It would help if you took the safety of margin here.

Always.

When should you use spread trading?

Spread trading is best used when an investor is neutral about the underlying asset’s direction but wants to make some money. The investor will buy one call option and sell another with a different strike price and/or expiration date. If the stock moves either way, the investor will still make a profit from the difference between the two options.

It’s a valuable plan when you are holding stocks that aren’t volatile or when you think you know the (short-term) direction of the stock.

When should you buy protective puts?

Protective puts are best used when investors want to protect their existing long position in a stock. By buying a put option, the investor is buying the right to sell their stock at a specific price at a particular time. If the stock price falls below the put option’s strike price, the investor can exercise their choice and ensure they still get the higher price for their stock.

Last year (2022) was a perfect example of using such a strategy. It’s like any other type of insurance, and you are paying a relatively small premium to keep your more considerable investment ‘safe.’ It’s tricky because the small premium becomes expensive when the market crashes.

When should you sell puts?

Selling puts are best used when an investor is willing to buy the underlying asset at a specific price. The investor will sell a put option, setting a strike price they are willing to pay for the investment. If the stock price remains above the strike price, the investor will keep the premium from selling the put option. However, if the stock price drops below the strike price, the investor will have to buy the stock at the strike price but still, keep the premium.

It is a good plan when you want to enter a position in a company, but the current price is too high.

A reminder what are Calls and Puts

Options come in a variety of forms, and it’s important to understand the risks associated with each type of option. Here are some of the most common types of options and the risks associated with them:

1. Call Options: A call option gives the buyer the right, but not the obligation, to buy a security at a predetermined price. The risk associated with call options is that the underlying asset may not increase in value as expected.
   • Buying a call: You have the right to buy a security at a predetermined price.
   • Selling a call: You have an obligation to deliver the security at a predetermined price to the option buyer if they exercise the option.
2. Put Options: A put option gives the buyer the right, but not the obligation, to sell a security at a predetermined price. The risk associated with put options is that the underlying asset may not decrease in value as expected.
   • Buying a put: You have the right to sell a security at a predetermined price.
   • Selling a put: You have an obligation to buy the security at a predetermined price from the option buyer if they exercise the option.
3. Spreads: A spread is a combination of two options, usually a call and a put. The risk associated with spreads is that the underlying asset may not move in the expected direction.

It’s important to understand the risks associated with each type of option before you start trading. By understanding the risks, you can make more informed decisions when trading options.

How to Trade Options Successfully Over the Long-Term

Options trading can be a great way to enhance your investment returns over the long-term. However, it is important to understand the risks associated with options trading and to have a thorough understanding of the strategies you are using. Here are some tips for trading options successfully over the long-term:

1. Research the Market : Before entering into any options trade, it is important to do your research. Understand the underlying asset (do you know this company?) and the market conditions that could affect the price of the option.
2. Use Risk Management Strategies: Options trading is inherently risky, so it is important to use risk management strategies to limit your exposure. Consider using stop-loss orders, position sizing, and other strategies to protect your capital.
3. Utilize Technical Analysis: Technical analysis can help you identify potential entry and exit points in the market. Use technical indicators, chart patterns, and other tools to gain insight into the market’s direction.
4. Monitor Your Positions: Once you have entered into a trade, it is important to monitor your positions closely. Pay attention to the price movements of the underlying asset and adjust your positions accordingly.

Good luck.

Disclaimer

It is important to note that the information provided in this document is for informational purposes only and should not be considered financial advice. Trading options carries a high level of risk and is not suitable for all investors. Before trading options, it is important to understand the risks involved and to have a thorough understanding of the strategies you are using.

You should always consult with a financial professional before making any investment decisions.