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10 Best Option Trading Strategies and Outcomes for Indian Market (2024)
Looking for the best option trading strategies? Read this article to get a detailed analysis of option trading strategies.
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Options Strategies? Sounds serious? Are you already concerned? Well, don't worry! We'll make it easy for you to solve this problem.
Let's start by talking about the lottery model of the game, where we wager on a lottery ticket with a highly slim chance of winning. But if we succeed, it's a goldmine.
Like the game above, when we trade options, we are aware of some risk involved, yet we nevertheless partake in it, hoping to win a jackpot. Our experts will take you through the best option trading strategies and examples in this article. So, keep reading!!
Options are a type of derivative contract that offers holders the option to purchase or sell a security at a specified price at a future date but not the obligation to do so. The options sellers charge a sum known as a premium for such a privilege.
Option holders will let the option expire worthlessly and decline to exercise this right if market prices are adverse, limiting possible losses to the option premium. On the other hand, if the market shifts in a way that increases the value of this right, it uses it.
Call and put contracts are the two main types of options. When purchasing a call option, the contract's buyer has the right to purchase the underlying asset later for a fixed sum known as the exercise price or strike price. A put option allows the buyer to sell the underlying asset at a future date and price.
Let's look at some of the best option trading strategies that a novice trader may employ using calls or puts to reduce risk.
One of the most successful trading strategies in the bullish market is buying one call option, At-The-Money (ATM), and selling the call option, Out-Of-The-Money. This is known as a bull call spread. It is essential to remember that both calls must have the same underlying stock and expiration date.
With this technique, gains are realised when the underlying stock price rises, equal to the spread less the net debit, and losses are experienced when the stock price declines, equal to the net debit. The premium paid for a lower strike than that received for a higher strike results in a net debit. The difference between the higher and lower strike price is called the Spread. Bull Call Spread provides protection when prices decline and have a profit cap.
When option traders are slightly positive on the underlying asset's direction, they might use the bull put spread as one of their successful options trading strategies. This tactic is comparable to the bull call spread, except we're buying puts instead of calls. Using this approach, you would purchase 1 OTM put option and sell 1 ITM put option.
It's important to remember that both puts must have the same underlying stock and expiration date. In contrast, the possible loss is restricted and happens when the stock price drops below the long put's strike price. A bull put spread is created for a net credit, or net amount received, and it incurs benefit from an increasing stock price limited to the net credit received.
A guaranteed options trading strategy is the call ratio back spread, which is used when one is highly bullish on a stock or index. Using this method, traders may earn indefinitely from rising markets and just a small amount from falling ones.
Only if the market stays inside a specific range does the loss occur. In other words, traders can benefit when the market goes either way. This three-legged method involves purchasing two OTM call options and offering one ITM call option.
The bear call spread is one of the two-leg bearish market guaranteed options trading strategies. In this approach, 1 OTM Call option with a higher strike price is purchased, and 1 ITM Call option with a lower strike price is sold. It is essential to keep in mind that both calls must have the same underlying stock and expiration date.
When stock prices decline, a bear call spread is created for the net credit, and this tactic is profitable. The maximum possible gain is the net credit, and the maximum possible loss is the spread minus the net credit. The difference between the premiums received and paid is the net credit.
This tactic is quite similar to the Bull Call Spread and very simple to use. This technique is used by traders when they have a modestly pessimistic view of the market or anticipate a modest decline in the market.
Using the Bear Put Spread approach, the ITM Put option is purchased, and the OTM Put option is sold. It is important to remember that both puts must have the same underlying stock and expiration date. This tactic is created for a net debit or net cost and earns money as the price of the underlying stock declines. The spread minus the net debit determines the maximum profit, while the net debit determines the maximum loss. The difference between the premiums paid and received is the net debit.
One of the bearish-to-neutral options strategies is the strip, which entails purchasing two ATM puts and one ATM call. It should be noted that these options must be purchased with the same underlying strike price and expiration date.
At the time of expiry, traders can benefit if the underlying stock's price makes a significant move in either the up or down direction, but often, enormous profits are made when the prices move down. The total loss related to this approach is restricted to the net premium paid, and the maximum profit is infinite.
One of the easiest market-neutral option trading techniques, the long straddle options strategy ensures that the P&L is unaffected by how the market goes. The ATM Call and Put options are purchased using this approach.
Both options must have the same underlying, same expiration, and similar strike. Profits are limitless, and losses are small. Short Straddle entails selling the ATM Call and Put options. The maximum loss is zero, and the profit equals the whole premium.
The main distinction between the straddle and the strangle is that the former requires us to purchase a call and put options with an ATM strike price, whilst the latter requires us to purchase a call and put options that are OTM.
Purchase of one OTM put and one OTM call option is a long strangle. In this case, the profit is limitless, and the worst loss equals the flow of net premiums. Conversely, selling a put and a call OTM option is what the short strangle entails. The maximum loss is uncapped regardless of price movement, while the maximum gain is capped at the total premium collected.
The butterfly spread is one neutral options strategy that combines bull and bear spreads with defined risk and restricted reward. The gap between the options with higher and lower strike prices and the at-the-money options is the same.
In the long butterfly call spread, one ITM call option is purchased, two ATM call options are written, and finally, one OTM call option is purchased. Selling one in-the-money call option, purchasing two at-the-money call options, and selling one out-of-the-money call option comprise the short butterfly spread strategy.
One of the options strategies is the iron condor, which has four strike prices, two puts (one long and one short), and two calls (one long and one short). The same expiration date must apply to everyone. The maximum profit is realised when the underlying asset closes between the middle strike prices at expiry.
Whatever method you choose to use, there are a few important things you should do before you begin trading:
Calls and puts are the two subcategories of options. Call options grant the right to purchase an underlying asset at a predefined price (the strike price) on or before a certain date to the contract buyer or the holder.
Put options, on the other hand, allow the buyer to sell the underlying asset at the strike price by the specified date. The sellers will charge an additional fee to option purchasers for taking the other side of the deal.
A trading strategy is the road map to determine exactly what, when, and how you will trade throughout your market time. Your strategy must be specific to your objectives, risk tolerance, and needs.
By developing an options trading plan, you may precisely determine how much cash you can devote to each technique and how much risk you are ready to accept with each position. A trading plan also removes many of the hazards associated with trading psychology. Stick to your strategy, and you'll make rational choices rather than ones motivated by greed or fear.
Regardless of your options strategy, it is critical to comprehend the risks involved with every transaction and establish an effective risk management plan before trading. The "Greeks" are the most significant variables that might aid you in determining the risk associated with each investment. These are:
Trading options are not a suitable place for beginners to start. It requires substantial training and experience. To begin with, stocks are preferable to have a thorough grasp of the stock market. Since prices fluctuate frequently and you risk losing all of your money, it is challenging to follow price changes. Options' complexity makes them infamously dangerous. Options are thus not advised for novices.
According to the current study, people should anticipate the following benefits from trading options:-
Even though options are typically considered high risk, traders may use these best option trading strategies to minimise risk. So even traders afraid of taking risks may increase their total earnings by using options.
However, it's crucial to comprehend the risks associated with every investment to decide whether the possible reward justifies them. We hope that you found this blog to be interesting and that you will make the most of its practical applications. Also, spread financial knowledge by sharing this site with your loved ones and friends.
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