With the growing popularity of options trading in India, more people have started to join this exciting world of options trading.
It is a form of derivative contract which gives you an opportunity to buy or sell an underlying asset at a certain price at a set date in the future.
Options can be used as hedges against stock positions or as speculative plays. Options can also be used for income generation by selling short-term option positions with borrowed funds.
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12 Options Trading Strategies
- Bull Call Spread
A bull call spread is an options strategy that consists of purchasing a call option and selling another call option of the same type with a higher strike price.
The difference between the two strikes is the net credit received when selling the options, which is used to purchase more options with a lower strike price.
The maximum profit potential of this strategy occurs when both calls are at or near their respective expiration dates and both expire in the money.
- Bull Put Spread
A bull put spread is an options strategy that consists of selling one put option and buying another put option of the same type with a lower strike price.
The difference between these two strikes is the net debit paid when buying the options, which is used to sell more options with a higher strike price.
The maximum profit potential on this strategy occurs when both puts are at or near their respective expiration dates and both expire in the money.
Also, read What is a lot size in options trading?
- Call Ratio Back Spread
The call ratio back spread is a bullish strategy that consists of purchasing a call and selling a put with the same strike price, expiration date and underlying asset.
This strategy can be used to generate a credit in the event that the underlying stock moves higher and moves beyond the breakeven point of the spread.
In this case, if you are long one call and short one put, then you would be making money on both sides of the trade if your goal is to generate a credit.
- Synthetic Call
The synthetic call is another bullish strategy that involves selling a call with one month or less until expiry, while simultaneously buying an option which has no expiration date.
The synthetic call gives you the right to buy the stock at a certain price before it reaches its lowest price during that month. You can use this strategy to generate income while waiting for your stock to reach its lowest price.
- Bear Call Spread
A bear call spread is a combination of two options with a strike price that is lower than the underlying stock price and one option that has a higher strike price than the stock.
The difference between the two options is called the vertical spread, and it costs less to buy than it does to sell because both options have the same expiration date.
The call with the lower strike price has greater value if you want to sell your shares early in order to profit from the rally.
The call with the higher strike price has greater value if you want to buy shares at a lower price and then sell them at a higher one.
Also, read – How to Choose Stocks for Options Trading?
- Bear Put Spread
A bear put spread is a bullish strategy that involves selling one put, and buying a second put at a lower strike price. It works if the underlying stock falls in price, which would result in the second put becoming worthless.
In most cases, the maximum profit on this strategy is limited to the difference between the two strike prices of your puts. This strategy is most effective when you have a strong opinion on the direction of an asset’s price movement.
The strip option is a vertical spread with a short call, short put and long position. The idea behind this strategy is to profit from volatility by selling the underlying asset at a strike price that is lower than the current market price. As a result, you will profit if the underlying asset falls below your strike price.
The strategy is based on the concept of time decay, which states that as time passes, options lose value until they expire worthlessly.
So by selling an option that has a very low strike price, you can generate profits as time goes on until expiration or until you decide to sell your position. You can also use this strategy to increase leverage in your portfolio.
- Synthetic Put
A synthetic put is a combination of a call and put option. The trader buys one put and sells the other or vice versa.
Synthetic puts can be used as bearish options strategies. By selling a put and simultaneously buying another, you are essentially creating an unlimited risk on your long position.
This strategy is best used when the underlying asset has recently depreciated significantly in price, but there is still potential for it to decline even further.
- Long & Short Straddles
Straddles are a combination of options that have an expiration date far in the future and one that is closer to expiration.
The closest expiration date is known as the straddle strike price, which is the highest price paid for an option contract. The most distant expiration date is known as the straddle exercise price, which is the lowest price paid for an option contract.
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- Long Straddle
Long Straddles are combinations of options with strikes above and below the current stock price. The long straddle strategy involves buying one call and one put with different expiration dates on a single underlying security.
This will give you a credit spread if your stock goes up, or a debit spread if it goes down. You can vary this type of strategy by buying a higher or lower strike call or put.
- Long & Short Butterfly
The long butterfly is a bullish strategy that involves selling one call and buying two puts. It is designed to profit from a rise in the underlying stock’s price. The long butterfly must be used with caution because it increases the potential for loss.
- Long & Short Iron Condor
The iron condor is a bearish strategy that involves selling one call and buying two puts. It is designed to profit from a decline in the underlying stock’s price. The iron condor must be used with caution because it increases the potential for loss.
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Options trading strategies are a great way to make money in the markets. While there are many options that can be used for trading, it is important to choose the right strategy for your needs.
Want to learn more about options trading? Try Swastika Investmart Ltd and get consistent returns with options trading. Click here to open demat account or feel free to contact us.