If you’re on this page, it is because you’ve probably spent a lot of time searching for the most successful options strategy. Whether you’re curious about the most profitable options strategy or wondering which option strategy is most successful, this guide will provide insights tailored to various market outlooks. We’ll also spend a few words on why focusing on which option strategy is most profitable may not be a great idea.
Key takeaways
- The most successful options strategy is one that has the highest probability of profit, taking into consideration the trader’s market outlook.
- In a bull market, selling puts can be a profitable strategy due to the statistical edge of most puts expiring worthless. In a bear market, buying put spreads can offer a controlled risk approach while betting on market declines.
- In a sideways market, selling options in low volatility can be beneficial, and a wide Iron Condor strategy is often used to limit potential losses.
What Is the Most Successful Options Strategy?
First of all, let’s agree on the meaning of “successful” in this context to better understand what we mean by “most successful options strategy.” In options trading, being successful means having a high probability of profit. It’s not just about striking it rich overnight, but about making informed decisions that consistently yield positive results over time.
Furthermore, if you are hoping to find a one-size-fit-all strategy, this is not what this article is about: the most successful options strategy depends on your market outlook. This outlook helps traders choose the right strategy for the current market conditions, whether it’s bullish, bearish, or sideways. In this section, we’ll explore different strategies tailored to these market conditions to help you find the most successful options strategy for your needs.
Here is a table that synthetically compares the three most successful options strategies mentioned below:
Bull Market Strategy
In a bullish market, one of the most successful options strategies involves selling puts. Why? Because about 94% of puts expire worthless, giving you a statistical advantage. Selling puts allows traders to profit from this high expiration rate.
For your information, this is what the typical profit & loss (P&L) profile for selling puts looks like:
Notice the following aspects from this most successful options strategy:
- Capped profit on the right
- Potentially unlimited loss on the left
You may be scared to see the unlimited loss potential, but remember that, given the amount of puts expiring worthless, this scenario is quite rare. If you sell a put that is sufficiently out-of-the-money (OTM), you have very good chances of profit.
This most successful options strategy works well when market sentiment is optimistic, and there’s a strong upward trend. By selling puts, you can earn premiums while potentially acquiring stocks at a lower price if the market moves against you.
Bear Market Strategy
Bear markets present unique challenges, especially with short selling. While selling calls might seem like a high-probability option, the risks can be significant. If the market moves up (as it normally does, in the long run), losses can escalate quickly—imagine shorting at 100, and after a 10% rise, you’re at 110 (loss of $10); another 10% rise makes it 121 (loss of $11), increasing losses.
Instead, consider buying put spreads for a safer bet. A bear put spread requires purchasing a put option at a higher strike price, and simultaneously selling a lower-priced put. In this way, the sold put helps fund the purchased one, reducing overall investment risk.
Notice the following aspects of this P&L profile:
- Limited loss on the right
- Capped profit on the left
This approach allows you to speculate on declines without the same level of risk. A bear put spread, particularly after a company releases a poor earnings report, can be a successful strategy. It provides a buffer, limiting potential losses while still capitalizing on market downturns.
The bear put spread is a debit strategy, but you could also opt for its credit “sister” strategy: the bear call spread. Both strategies can work very well in a bearish market, as we showed you in the past when we talked about trading a negative earnings report (you’ll find a link to our article on the topic at the end of the text).
Sideways Market Strategy
When the market is moving sideways, selling options in a low-volatility environment can be beneficial. If you anticipate volatility to be lower than expected, selling options can provide steady income. Most traders aim to limit their losses in such scenarios. This is where the Iron Condor strategy comes into play.
To open an iron condor, you will do the following:
- Sell an OTM call
- Buy a further OTM call (creating the “condor” shape)
- Sell an OTM put
- Buy a further OTM put (further out than the sold one)
Note that this most successful options strategy has a defined maximum profit and loss, making it less risky than other approaches. The key is to choose strike prices that generate sufficient net credit when selling while ensuring enough distance between strikes for your desired risk/reward ratio.
Bull Market Example: Selling Puts
Let’s begin with a naked put example for a bullish market outlook. Using our options screener , you might spot an opportunity with Exelixis (EXEL). Suppose EXEL is trading at $25.82. You could sell a $23 put expiring in three weeks, with the following P&L:
This is what you should notice in the chart above:
- Profit Potential: Your profit is capped at $70 if EXEL stays above $23 by expiration.
- Breakeven Point: The breakeven is $22.30; below this, losses grow linearly.
EXEL’s price history shows it’s been above $22.30 for a while. It’s currently oversold after a streak of poor performance days, as you see from the chart below:
Evaluating EXEL’s financial stability and market trends suggests it’s a solid candidate for this most successful options strategy. In this context, selling puts on a quality stock like EXEL can be considered one of the most profitable options strategies, aligning with the search for which option strategy is most successful in bullish conditions. This approach allows you to leverage market optimism while managing risk effectively.
Bear Market Example: Bear Put Spread
Next, let’s take a look at a bearish market outlook example. Using an options scanner, you might find a promising bear put spread opportunity with DraftKings (DKNG). With DKNG trading at $34.35, consider buying a $38 put and selling a $36.5 put, both expiring in two weeks. Here is your P&L:
Note the two most important things here:
- Profit Potential: You can achieve a capped profit of $51.75 if DKNG stays below $36.5 by expiration.
- Breakeven Point: The breakeven is at $37.02. Losses start accumulating above this, capped at $98.25 if DKNG surpasses $38.
Also, take a look at the stock price chart:
DKNG has shown resistance near your breakeven point. Recently, it failed to break this resistance, signaling a potential bearish trend. With our DKNG’s financial score at a low 3 out of 10, this adds to the bearish case.
This setup could be considered one of the most profitable options strategies when facing a bearish market. Note that this was just an example: if you manage to correctly evaluate historical price behavior and a company’s financial health, you can determine which option strategy is most successful for specific market scenarios.
Sideways Market Example: Iron Condor
Options trading also lets you profit from a sideways market, so let us look at an example. Using an options scanner, you might find a promising Iron Condor setup with Boeing (BA). With BA trading at $170.71, consider this combination: buy a $155 put, sell a $175.5 put, sell a $192.5 call, and buy a $195 call, all expiring in two weeks. Here is your P&L:
As we did above, this is what you should notice from the chart:
- Profit Potential: The setup yields a capped profit of $57.50 if BA stays between $157.5 and $192.5 at expiration.
- Breakeven Points: Breakeven occurs at $156.93 on the downside and $193.07 on the upside. Losses are capped at $192.50 if BA moves outside this range.
BA has been trading within these breakeven points for months, as you see from the historical price chart below:
This consistent range increases the probability of profit, as the market views these levels as support and resistance.
This Iron Condor strategy can be one of the most profitable options strategies when aiming to capitalize on market stagnation. By assessing Boeing’s trading pattern, traders can determine which option strategy is most successful for their specific goals.
Finding the Most Profitable Options Strategy vs. the Most Successful Options Strategy
As a last note, we’d like to clarify that the most successful options strategy isn’t always the most profitable one. If you define the most profitable options strategy as having the highest profit ratio, long call and long put are strong contenders.
These strategies offer capped losses with uncapped profit potential. However, they’re not always the most successful because time works against you, lowering their success rates compared to other strategies. Understanding this distinction helps you decide which option strategy is most successful and which option strategy is most profitable for your trading goals.
