What is an option strategy?

Option strategies involve the coordinated purchase or sale of multiple options or futures contracts, leveraging variations in specific variables like strike price, expiration date, and option types. These strategies are crafted to serve various purposes such as hedging existing positions, capitalising on arbitrage opportunities, or seeking profits from the expansion or contraction of spreads.

These strategies come in various forms, ranging from basic to complex, and are designed to cater to specific market conditions or trader objectives. Common option strategies include straddles, strangles, spreads (bullish/bearish), condors, butterflies, and iron condors, among others. Each strategy has its unique characteristics and risk-reward profiles.

Traders employ option strategies to manage risk exposure, generate income, or speculate on price movements in the market. The strategies might involve combinations of buying or selling call or put options with different strike prices and expiration dates to optimise potential gains or minimise losses.

Furthermore, traders can also construct customised strategies by combining different options or futures contracts according to their market outlook and risk tolerance. Understanding and implementing various option strategies require a sound understanding of the market dynamics, pricing models, and the behaviour of the underlying asset to make informed trading decisions.