4 Best Options Trading Strategies for 2023

The general market consensus opinion is that there is a reasonable chance of a U.S. recession sometime in 2023. During periods of challenging economic conditions and market uncertainty, volatility tends to rise.

There are specific options trading strategies that tend to outperform during periods of higher-than-normal volatility. In this article, we discuss four trading strategies that may benefit from higher volatility.

When implied volatility is high, premium-selling options traders can collect more premium income, and the breakeven points tend to be further away from the stock price. Therefore premium-selling strategies tend to outperform during periods of high volatility.

Short Put or Call

One of the simplest premium-selling options strategies is the short option. A short put is when a trader sells a put that they do not already own. The short put strategy is used by bullish traders who believe a stock will be above the strike price on or before expiration.

The short call is a bearish strategy used by traders who believe a stock will be below the strike price before expiration; therefore, sells a call they do not already own.

In this short put or short call strategy, the trader collects a premium and has the obligation to buy the stock if exercised in the case of the put or sell the stock in the case of the call.

The short option trade will profit if it expires out of the money or if theta decay allows the trader to buy back the position prior to expiration at a profit.

Short Put Trade Example

Below is the profit graph of a 16-delta, short put on the SPY ETF with a strike price of $375 and 45 days to expiration.

In all of the trade examples in this article, we use short strike prices as close to 16 delta as possible. Options with a delta of 16 have strike prices that are approximately one standard deviation away from the stock price.

In this case, the trader collects a $302 premium and has a breakeven point of $371.98. The breakeven point is 8.0% below the existing stock price. If the SPY stays above $375 at expiration, the trader will earn 5.8%.

Credit spreads

A put credit spread is a bullish strategy when a trader sells a put with a certain strike price and buys a put with a higher strike price with the same underlying stock and same expiration and collects a premium.

A call credit spread is a bearish strategy when a trader sells a call with one strike and buys a call with a lower strike price and the same expiration and same stock, collecting a premium.

Put Spread Trade Example

Below is a profit graph of a $5 wide 16-delta SPY ETF short put spread, with a $375 short strike price that is about one standard deviation away from the current stock. There are 45 days to expiration, and the trader collects $66. The breakeven point is 7.4% away from the current stock price. If the stock stays above $375, the trader will earn a 13% return on investment for 45 days.

Strangle

A short strangle is a short put and a short call at the same time with the same expiration and same stock. It is a non-directional trade that is profitable if the stock price stays between the strike price of the call and put.

Strangle Trade Example

The profit graph below is an example of 45 day to expiration SPY strangle with a 16-delta short put (375 strike price) and a 17-delta short call with a strike price of $430. The trade collects $513 and earns a 9.4% return on investment if both sides expire out of the money.

Iron Condor

An iron condor strategy is basically a put credit spread and a call credit spread at the same time, with the same stock and the same expiration.

Iron Condor Trade Example

The profit graph below is an example of an iron condor for a SPY ETF with 45 days to expiration. Like the other examples, the put side has a short delta of 16 delta and a strike price of $375. The call side has a 17 short delta and a strike price of $430.

The trade collects $140 and will earn a 39% return on investment over 45 days if the stock stays between $375 and $430, and both sides expire out of the money.

Final Thoughts

We believe there is a reasonable chance that 2023 could be a year of increased market volatility due to the potential of an economic recession. An economic recession could lead to slower earnings growth and increased market uncertainty which could cause stocks to experience price swings.

Increased volatility can be an opportunity for options traders to collect higher premiums and have slightly larger breakeven points.

Trading strategies that might outperform during 2023 include short puts and calls, put credit spreads, call credit spreads, strangles, and iron condors.

We hope you found this article helpful. Thanks for reading.

Past performance is not an indicator of future performance. This is not financial advice and should be used for informational purposes only. Consult a financial advisor.

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