High probability options trading is a difficult concept to grasp, especially if you’re a newbie in the stock market.
Perhaps the most significant setback for a trader is when he speculates a stock to move towards a profitable price, but it ends up doing the complete opposite.
What if we told you that instead of predicting the future outcome of stock, it is more profitable to rule out the price a stock won’t go?
Confused?
That’s the high probability options trading concept for you. Luckily, you’ve landed on the right page where we’ll make this.
So, if you’re looking to dive into options trading for success, here’s our list of the best high probability options trading strategies.
Contents
- What is High Probability Options Trading?
- 5 Advanced Options Trading Strategies with High Probability
- The Covered Call
- The Married Put
- Bull Call Spread and Bear Put Spread
- The Protective Collar
- Long Straddle And Long Strangle
- Final Words
What is High Probability Options Trading?
Let’s look at high probability options trading in a simple way.
For example, it’s your wedding, and you’re wondering what gifts you’ll get.
It is impossible to figure out who will give you what unless someone tells you beforehand.
In this case, it is much easier to think about what you’re not likely to get.
Supposing no one’s going to give you a fully-funded exotic honeymoon trip or a Mercedes Benz.
In the same way, you can never predict the way stocks will behave in the future.
But, you can strategize your trades based on the price points a stock is not likely to hit.
This is possible with high probability options trading.
Advanced options trading strategies mainly let you hold your stocks at a specific strike price until their expiration.
While you hold the stock, you can easily sell or purchase an asset at a higher price than its market value or a lower price, depending on your strategy.
Remember, the price range can expire in anywhere from a few hours to even years at a stretch.
Prices Rising = Long Calls
So, if you predict the price to rise, you should go for the call option.
On the contrary, if you foresee the price falling, you should go for put options.
Mainly, you can work with high probability options trading in two ways: by selling or by buying stocks.
In advanced options trading strategies, these phenomena are known as long and short. However, if you want to achieve options trading success, you’ll have to pay a premium.
This premium is pre-decided by the market based on its volatility.
If you don’t have a ton of money to work with, you can start small with a commission free trading platform like Webull or Robinhood.
This can be a decent way to put real money to work (but small dollars).
That way you can get a feel for the way options trade.
Here’s a list of the leading high probability options trading strategies with their respective explanations to help you make a calculated decision.
5 Advanced Options Trading Strategies with High Probability
High probability options trading strategies are the ones that let you take advantage of the flexibility in a particular market.
The biggest mistake any options trading can make is to dive into an evident option without considering the numerous available strategies.
These strategies not only help you maximize profits but minimize your risk to some extent as well.
If you’re thinking about indulging in advanced options trading, here are some high probability strategies you should know.
They will help you buy trading options strategically so you take a calculated risk according to your market conditions.
1. The Covered Call
Considering that you have a stock that you’re not planning to hold on to for an extended period.
This may be because you’re unsure of its future direction.
In this case, the covered call option might be an excellent way for you to sell out the stocks while mitigating the risk.
For example, you wish to use the call option pertaining to a stock that translates into 100 shares per call option.
Now, to use the covered call high probability strategy, you’ll have to sell one call option for every 100 shares you buy.
In this case, even if the price increases drastically, you’ll have a long call protection against your short call.
Thus the name, ‘covered call.’
The only downside of using the covered call trading option is that you should be ready to sell your own shares at the short strike price.
In simple words, just buy your target stock as you would in an ideal market situation and sell a call option on the same shares at the same time to cover yourself in case there’s a rise or drop in the price.
2. The Married Put
The married put is another high probability options trading strategy where you create protection for yourself if the price of your stock falls and earn revenue against it.
Think of it as an insurance policy.
While buying an insurance policy, you pay premiums beforehand in case an unpleasant accident takes place.
Similarly, while using the married put strategy, you’ll purchase some put options along with every risky asset.
Now, if you’re holding a put option, you can sell the stock you hold even on a strike price.
This ultimately provides risk protection while you’re holding the stock or asset.
So, you won’t take any significant damage, even if the price of your purchased stock drops steeply.
Similarly, you can simultaneously participate in other market opportunities as the stock you hold gains value.
However, the married put strategy is not void of disadvantages.
That’s because, as we mentioned above, you can never predict exactly how a stock will behave.
Considering you use the married put option, but the price does not drop, you’ll lose the investment you made in the form of a premium to purchase the put options.
3. Bull Call Spread and Bear Put Spread
The Bull Call Spread and the Bear Put Spread are contrasting options trading strategies that you can use according to the market condition and your position in the market.
Firstly, if you hold a bull position in the market, you can use the Bull Call Spread strategy by buying calls at the strike price.
After that, you sell the exact number of calls purchased at the same time.
However, when you sell the calls, they should go at a higher price than the ongoing strike price.
This way, you’ll be executing a vertical spread technique.
And, if you’re predicting the stock price to rise, you’ll considerably reduce the premium you spend.
Secondly, the Bear Put Spread strategy also involves spreading your holdings vertically.
But, your actions will be reversed in the technique.
Simply enough, instead of purchasing calls, you’ll buy put options and sell the same amount of puts into the market.
Mind you; all this will be done at a strike price that is lower than the typical cost of the stock.
The Bull Call Spread is for bulls who want the stock prices to rise.
In contrast, the Bear Put Spread is for those who expect their stock prices to decline.
By purchasing and selling the puts for the same asset with a similar expiry date, you limit your losses considerably in case of a price drop.
4. The Protective Collar
As the name suggests, this strategy lets you construct a protective collar around your profits.
To execute this high probability options trading strategy, you’ll have to purchase an OTM put option and sell an OTM call option at the same time.
This way, the long put you purchase maintains the stability of your potential sale price.
It also reduces any chances for further profits because you may have to sell the shares you own at a high price.
Supposing you’re going long on 100 shares of a company at $100.
Now, if the price goes up to $200 from the next month, you can form a protective collar around your profit by purchasing a put and a call for the month after that.
This way, you will be protected for at least $175 before the current strike price expires.
However, you’ll have to sell your rates at your call price if the shares are traded before the price expires.
5. Long Straddle And Long Strangle
The Long Straddle and Long Strangle options are somewhat similar but diverse high probability options trading strategies for investors unsure of how their assets will perform.
In a stock market, there are times when an investor is sure that the price range of the assets he is holding will face a significant change.
But, he is not sure whether it will rise or fall.
In this situation, the slightest mistake can cost you millions.
That’s why you should use the Straddle or Strangle strategies to ensure the probability of your assets.
To conduct a Long Straddle, you simply purchase a call and a put option on your asset at the same strike price and expiry date.
While conducting a Long Strangle, you’ll have to do more or less the same thing.
But, here you purchase OTM call and put options on the same asset with the same strike price and expiry dates.
In case you go for the Straddle, you’ll achieve the maximum gains possible if the price rises.
But, if it goes down, the only thing you’ll lose is the premium costs of the options you purchased.
On the other hand, if you go for the Strangle option, you’ll receive unlimited gains similar to the Straddle option.
What makes the Strangle a better option is that if the asset goes into a loss, your loss will be far lesser.
That’s because you’ve purchased OTM options, which cost lower premiums.
Final Words
That concludes our list of the best high probability options trading strategies for unpredictable stock markets.
Stock markets are always unpredictable in any case.
Purchasing the right options at the right time can help you reduce the risk factor and maximize your gains at the same time.
But, don’t buy trading options without formulating a proper strategy.
If you do, you can end up with considerable losses on premiums.
That’s why make sure to go through these high probability options trading strategies to see which one fits your position and your market condition before you attempt your next move.
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
