No option strategy is always profitable as profits depend on prevailing market conditions. However, hedging strategies can provide steady returns in certain scenarios as they aim to balance potential profits with risk management but are not foolproof against unpredictable market movements.
The choice of an option strategy depends on one’s market outlook, risk tolerance, and investment goals. For bullish outlook, one can use strategies like long calls, while long puts would be ideal for bearish outlook. Eventually, one will have to evaluate parameters like expected price movement, time horizon, and volatility to select the most suitable strategy.
The covered call is one of the most commonly used option strategies. This strategy involves holding a stock and selling a call option on it to generate income from premiums. It has gained popularity because it provides regular returns in a stable market while reducing downside risk, making it ideal for conservative investors.
The naked call is considered the riskiest option strategy as the trader here sells a call option without owning the underlying stock. This ultimately means if the stock price rises significantly, the losses can be unlimited, as there's no cap on how high a stock can go. Hence, this strategy is only suited for experienced traders willing to take high risks.
No option strategy is entirely risk-free, as all involve some level of market exposure. However, arbitrage strategies are considered low-risk as these involve combining calls and puts to lock in a risk-free profit due to pricing inefficiencies, though the gains are usually minimal after transaction costs.
The long call strategy has the potential for the highest return, as it allows unlimited profits if the stock price rises significantly, while limiting losses up to the premium paid. However, it carries a high risk of losing the entire premium paid if the stock doesn’t move as expected prior to its expiry. Hence, it is ideal for confident bullish bets on strong price movements.