There are many DeFI options trading strategies that can both minimize risk and maximize return. It takes little to learn how traders can take advantage of stock options’ flexibility and power.
Top 10 DeFi Options Trading Strategies
1. Covered call
This strategy is very popular and almost always better than naked stock. It allows traders to make profits even if the stock is not moving at all. Also, it reduces their losses if the stock falls. You must agree to sell your shares at a fixed price, the short strike price.
Let’s say an investor has a call option for a stock. Each call option represents 100 shares. One call option could be simultaneously sold for every 100 stock shares that the investor purchases. This strategy is known as a covered call because it covers the short call if the stock price rises rapidly.
2. Protective Put (Married Place)
This strategy involves buying shares of stock and simultaneously purchasing put options to purchase the same number of shares.
This strategy can be used by investors to protect their downside risk while holding stock. This strategy works in a similar way to an insurance policy. It establishes a price ceiling in the event the stock’s value falls significantly.
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3. Protective Collar
Protective collar strategies are achieved by simultaneously buying an out-of-the-money option and writing an option on an out–of–the–money call option. Both the expiration date and the underlying asset must match. Investors often use this strategy after large gains in their stock position. Investors can have downside protection because the long put helps lock down the possible sale price. The downside is that investors may have to sell shares at higher prices, which could reduce their potential for future profits.
4. Long Call Spread
This strategy is a type of vertical spread strategy. Vertical spread is the simultaneous selling and buying of options of the same type (puts, calls) with the same expiration but different strike prices.
A long call spread strategy allows investors to simultaneously purchase calls at a certain strike price and then sell the same number of calls for a higher price. Both options will have the exact same expiration date as the underlying asset. This vertical spread strategy is used by investors who are bullish on an underlying asset and anticipate a modest rise in its price. This strategy allows the investor to limit their upside and reduce the cost of the trade (compared to buying a naked option).
5. Long Put Spread
Another form of vertical spread is the long put spread strategy. This strategy allows the investor to simultaneously purchase put options at a certain strike price and then also sell the same amount of puts at lower strike prices. Both options can be purchased for the same asset and have the exact same expiration dates. This strategy is used a trader feels bearish about an underlying asset and expects that the asset’s value will decline. This strategy can yield both small losses and large gains.
6. Long Straddle
Long straddle options are when investors simultaneously purchase a call option and a put option on the exact same underlying asset. They have the same expiration date and strike price. This strategy is often used by investors when the price of an underlying asset is expected to move out of a certain range but they are uncertain of the direction. This strategy theoretically allows an investor unlimited potential gains. The investor is only allowed to lose as much as the total cost of the options contracts.
7. Long Strangle
An investor can purchase both an out-of-the-money call option as well as an out-of-the-money put option in a long strangle option strategy. They will do this on the same underlying asset and with the same expiration. This strategy is used by an investor who believes that the price of the underlying asset will see a large change but is uncertain about the direction. Because the options bought are out-of-the-money, strangles will almost always cost less than straddles.
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8. Long Call Butterfly Spread
A butterfly spread is an options strategy that combines bull and bear spreads. It has a fixed risk and a maximum profit.
An investor can combine a bull spread strategy with a bear spread strategy in a long butterfly spread that uses call options. They’ll also use three different strike price options. All options can be used for the same underlying asset with the same expiration date.
9. Iron Condor
The iron condor strategy allows the investor to simultaneously hold a bull call spread and a bull put spread. The iron condor can be constructed by selling one put out-of the-money and buying another putout–of–the–money with a lower strike, a bull put spread. And selling one put out-of–the-money and buying one call out–of–the–money with a higher strike, a bear call spread. All options have the exact same expiration dates and are made up of the same underlying assets. The spread width of the call and put sides is usually the same. This strategy is designed to profit from stocks with low volatility and earns a net premium. This strategy is popular because of its small premium and high likelihood of earning.
10. Iron Butterfly
An investor can sell an at-the-money put to buy an out-of-the-money one in the iron butterfly strategy. They will also sell an out-of-the-money call while simultaneously buying an at-the-money call. All options have the exact same expiration date, and all are in the same asset. This strategy is very similar to a butterfly spread. However, it includes both calls and put options (instead of one or the other).
Conclusion
DeFi options trading strategies include buying call options for bullish expectations, buying put options for bearish expectations, selling covered calls to generate income, and using spreads to limit risk. It’s essential to understand the market and risks involved before executing any strategy. DeFi options can provide opportunities but also carry significant risks.
