Before we get into the different listed options trading strategies used in Dubai, let’s talk about and how they work.
There are two types of equity instruments – calls and puts.
Calls give their owners the right to purchase an asset at a given price (the strike price) on or before a specific date (the expiry). It’s one of the main differences between them and puts, where put owners have the right to sell an asset at a specific price point before a designated date.
However, the most significant difference with these instruments compared to regular shares is that you do not need to own any equity to buy or sell calls/puts written on it. Instead, these instruments derive their value from the underlying meaning of written or derived.
Now that we know a bit about options, let’s take a look at some of the best strategies for listed options trading in Dubai.
The bull call spread
One of the most straightforward strategies is when you expect the underlying asset’s price to rise moderately soon.
You’ll need two calls – one with a lower strike price and one with a higher strike price – and you’ll sell the lower strike call and buy the higher one.
This strategy will net you a credit (the difference between the two premiums), which you can then use to purchase shares of the underlying asset at the lower strike price.
If the cost of the underlying asset rises above the higher strike price, you can then exercise your right to buy the shares at the lower price and sell them at the higher price, making a nice profit in the process.
The iron condor
This strategy is similar to the bull call spread but is used when you expect a more moderate decline in the underlying asset price.
You’ll need four contracts – two calls and two puts – with different strike prices. You’ll then sell one call, and one put at each of the two outer strike prices and buy one call, and one put at each of the two inner strike prices.
It will net you a credit (again, the difference between premiums), which you can again use to buy shares of the underlying asset. If the underlying asset price falls below the lower strike price, you can exercise your put options and sell the shares at a higher price.
If it rises above the higher strike price, you can exercise your call options and sell the shares at the lower price. You make a profit on the difference between the two premiums in either case.
The butterfly spread
Although it sounds complicated (we’re not kidding; we had to look up how to spell it), this is perhaps the most popular options trading strategy there is. It’s also relatively easy to get your head around and can be used in different market conditions.
The butterfly spread is created by buying two contracts at the middle strike price and selling four contracts at the higher and lower strike prices. This will net you a credit, which you can then use to buy shares of the underlying asset.
This strategy is similar to the butterfly spread but is used to protect your downside. You’ll need one contract – either a call or put – with a very high strike price.
You’ll then sell one contract at a much lower strike price and buy one at an even lower strike price. This will net you a credit, which you can then use to purchase shares of the underlying asset at a much lower strike price.
The high-strike call or put protects you against significant downside risks. If the price moves around by a moderate degree, this strategy won’t make you any money – but it won’t lose you money either.
The long straddle
Another strategy that should only be used when you expect a significant and immediate move in the price of an asset. Like we said before: it’s riskier than all other strategies we’ve mentioned so far because two premiums must be paid at once (not one).
The long strangle
It’s like the long straddle, but with different strike prices for the call and put options. It’s also riskier than any of the strategies we’ve mentioned so far because two premiums must be paid at once (not one).
These are just some of the best strategies for listed options trading in Dubai. Always consult with a financial advisor, or look at this site before investing any money into the stock market.