What are the 4 Levels of Advanced Options Strategies to Trade?

 

Trading in options you can find the combination of various strategies as per the market conditions and you risk and reward outlook. You can choose from simple to complex level of option strategies designed for different market situations for different types of traders.

The lower and simple strategies are less complex and less risky but suitable for beginners or inexperienced traders. While the high level of complex strategies can give you high returns but have a high potential of risks. As per the market experts option strategies are categorized into four different levels. Here we are going to talk about what are the different levels of advanced options strategies you can choose to trade in the option market.

4 Levels of Advanced Options Strategies

The levels of option strategy define the level of complexity and you can choose the right one as per your use. These strategies are designed for different types of traders as per their risk tolerance and expectation of returns from the market. Each progressive level of strategy becomes more complex making the trading risker in the highest levels of strategy.

Level 1 Option Strategies- Covered Calls &Cash Secured Puts

This strategy is less risky compared to other highly complicated strategies and suitable for the traders who are new in the option trading market. In this strategy, you should have the underlying stock and at the same time also sell the call options so that you can generate additional income through receiving the premium by selling the calls.

While on the other hand, you also need sufficient funds in your bank account to buy the stocks if the put is exercised the puts. This level of strategy is considered the safest one, as you have the underlying security and funds to cover potential purchases. Hence, this strategy is suitable for conservative investors looking for a steady income.

Level 2 Option Strategies — Long Options

In this level of option strategy, you need to trade in long positions like buying calls and puts. Long puts give you the benefit of gaining your contract value when the price of the underlying security decreases. While your long calls will give you the advantage of the increase in the contract value when the price of the underlying security moves upside.

Here the strike price and premium underwrite the breakeven point for the investor and offer more potential for rewards. Buying calls provides you with the right to buy the stocks at a predefined price while buying the puts gives you the right to sell the shares.

This level of option strategy is useful for traders looking to take advantage of the speculation on market movement. However, few traders exit from their trade position before the date of expiry if its value increases. As the option contract reaches its expiry level will lose its value, especially if the contract is in deep out of money. Hence, an option contract needs to be kept moving before the expiry to avoid the impact of the time decay.

Level 3 Option Strategies — Option Spreads

In this little more complex level of option strategy, you have to trade in multiple contracts of the same underlying security. However, as per your trading objectives, you can choose the strike price and expiration date. You can reduce your net cost of trade by selling a call of the same expiration date price but at a higher strike price.

The profit potential in this strategy is limited difference between the buy call strike price and the short call strike minus the net debit paid. This strategy offers more controlled profit scenarios and can limit risk compared to straight long options. However, the option spread can be more complicated and needs additional understanding of the option market.

Level 4 Option Strategies- Naked Calls and Puts

This is one of the most complicated as well as riskiest levels in the option trading. Under this strategy, you can sell, the options even without holding the shares of the underlying security and also not have sufficient funds to cover your other options trade positions.

Trading in this strategy is highly risky, especially when trading in naked calls as such an uncovered trade position can go into losses, beyond your investments.A naked call possesses unlimited risk, as there is no cap on how much the price of the underlying security can go.

While naked puts also have the risk of potential losses you can offset some losses with the premium you received. Apart from that to sell the options, you also, need extra funds to deposit as the margin money. Hence, if you have deep knowledge and experience in trading at these levels, then you should enter into the trade positions.

How to Choose the Right Level of Option for Trading?

Choosing the right level for trading in the option strategy is not that difficult as each level has its own risk and level of complexity. You can choose to trade the right one that you can understand and possible for you to enter into multiple trade positions as per your risk tolerance and reward expectations from the market.

If you have recently started trading in options, you should start with the first level. However, if you are a veteran in this segment with a clear understanding of every aspect affecting the option price, then you can take a risk and choose to trade with level 4. But still, you should start with level 2 and level 3 and later try the fourth one when you earn profits in these levels.