![]() Therefore, this strategy is best used when the financial markets are somewhat consistent. reward, your profits will be limited and your losses potentially huge. With lower volatility, the expected returns are greater (and the reverse is true with higher volatility). This approach to trading works incredibly well if you’re expecting at least a moderately bullish market trend. In the worst-case scenario, you’re going to have to sell shares that you own because with this strategy, you put the underlying asset as collateral. The reason why it’s so popular is because the amount of risk you have to take on is rather minimal, especially compared to some of the other derivative trading strategies out there. Covered Call StrategyĪre you holding a long position on an underlying asset and are looking for a low-risk strategy to squeeze out even more profits? Then consider utilizing a covered call strategy. ![]() In essence, this is an options strategy that grants you short-term protection against swingy market volatility at the expense of limiting your profits when the market trends finally do start going up. It consists of a long position on an underlying asset, coupled with both a put and a call option at the same time. It’s also a common tactic that brings about some stability when the financial markets are swinging wildly in both directions. What does a savvy trader do when the goal is to secure one’s profits without selling their shares? Utilizing the protective collar strategy is the perfect solution for this exact purpose. Also referred to as “long box strategy”, this is a form of arbitrage where a trader buys two spreads at the same time, both the bull call spread and matches it with the bear put spread.īut what does this accomplish, since these moves clearly lie on the opposite end of the spectrum, with the only common ground being their expiration dates and strike prices? The right time to do this is when the spreads are underpriced when compared with their expiration values and that’s how a savvy trader can take advantage of it. ![]() Now that you know how to capitalize on both bear and bull markets alike, it’s time to step things up a notch and learn to put another spin on it with the box strategy. But on the flip side, you’ll never have to worry about losing the entire premium paid in case things don’t go your way. One of the major advantages of this strategy is that it effectively limits your risk, even though the profit you stand to make is somewhat limited as well. But doesn’t this sound self-defeating, you may ask? The catch is, that you are going to do so at a higher strike price, which is what makes all the difference. In addition, what you should be doing is to also be selling a call on the same underlying asset (the expiration month should also be the same). So what do you do when you expect the market trends will shift upwards? You should utilize the bull call spread strategy.Īs the name implies, this involves buying a call on the underlying asset, but the story does not end there. Bull Call Spread Strategyįinancial markets can go either up or down, so far so clear. What does this achieve? If the market does indeed go down in line with your expectations, this allows you to capitalize on the market trends as well as the price of the asset. At the same time, you should also be doing the same move once again (same asset, same expiration month), but at the same time, the strike price should be lower. You do this by buying a put on an underlying asset. In essence, the strategy revolves around making the bear market play out to your advantage. So if you have any reason to believe the financial markets will be going down soon, you could consider the bear put strategy. Whether you’re trading gold-cash, GBP/USD, or any other cash derivatives, a CFD trading or a spread betting platform will tell you that financial instruments are all about making the best of every market state, whether it be bearish or bullish. On the other hand, sticking to a strategy allows for consistency over the long term and reduces the risk of being prone to emotional trading.Īlthough every derivatives trader eventually develops their own unique approach and style, the following 10 derivative trading strategies make for a good starting point to being your trading journey: 1. ![]() The content on this page is for information purposes only.Īpproaching derivative trading without a sound and solid strategy is like trying to steer a boat without a rudder. Please note that we are not authorised to provide any investment advice.
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