Over the last few years, options trading has picked up in Indian markets and now accounts for a large share of market volume. Retail traders enthusiastically participate in this segment of the market valiantly taking on the professionals.
What attracts retail traders in the options market is the potential of earning in multiples of their investment amount in a short period of time. Options are one market where one can multiply their capital in a short period but at the same time, there is the risk of losing it all. It is therefore advisable to understand options and learn some basic high probability strategies to start with before trying out the complex ones.
Let’s start with the definitions and slowly progress toward option trading strategies.
Note the interval between two strike prices is 50.
Exchanges decide the strike price of each index and stocks. For example, strike prices in Bank Nifty are traded at a differential of 100 points.
Call and Put options trade of each strike price and not at prices in between them.
When options are traded in the exchanges it is called options trading. A trader can buy or sell a call and put options in isolation or a combination of other options.
Options trading in stocks, commodities, or indices can be intraday, positional for a week or weeks, or even for months.
Options trading involves the use of various strategies. The selection of strategies depends on the view of the trader on the underlying stock or index. Unlike a cash or futures market where a trader can take a bullish or a bearish trade, an options strategy allows the trader to make money in a neutral market. In fact, there is a large population of traders, both retail and institutional, who consistently trade neutral strategies.
We shall tabulate various options strategies based on the view of the underlying.
Bullish | Bearish | Neutral |
Long Call | Long Put | Straddle |
Short Put | Short Call | Strangle |
Covered Call | Long Put Spread | Long and Short Iron Condor |
Protective Put | Short Call Spread | Long and Short Iron Fly |
Collar | Back Spread with Puts | Calendar Spreads |
Long Call Spread | Diagonal Spreads | |
Short Put Spread | Call and Put Butterfly | |
Back Spread with Calls | Double Diagonal Spreads |
The same strategies that are used in stocks can be used in trading indices, commodities, currencies, or any other asset class where options are liquid.
Options are a financial instrument whose price is dependent on that of the underlying asset (stock or index). Options offer an option buyer the right but not the obligation to buy an underlying asset by paying a token amount that is called the premium.
Call options allow the holder to buy the underlying asset at a given price, known as Strike Price, within a specific timeframe, known as expiries. The commonly traded timeframe for stocks is monthly. At any point in time, there are three monthly contracts open on which the trader can place his trades. A Call buyer has a bullish view of the underlying asset.
A Put Option allows the holder to sell the underlying asset at a given price, known as Strike Price, within a specific timeframe, known as expiries. A Put buyer has a bearish view.
A Put Option allows the holder to sell the underlying asset at a given price, known as Strike Price, within a specific timeframe, known as expiries. A Put buyer has a bearish view.
A Strike Price is a set of the price at which a derivative contract can be bought or sold. Every instrument has its own set of the strike price. The difference between any two consecutive strike prices is the same and is set by the exchanges. Call and put options trade on these strike prices.
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