Option trading sounds so difficult but if you use the right option trading strategy then you will be able to make a good profit even from complex trading.
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So let us here before the option strategy, let us first understand the lottery model to understand the basics of option trading . Whenever we bet on the lottery, we have a very low probability of winning, but when our bets are placed, we get a straight jackpot.
Well, if you have come to this article then you must be aware of option trading, like what is option trading and how to do option trading . So now let us try to understand the options trading strategy in a simple way.
In this article, we will discuss 5 such option strategies and if you follow the option trading tips and use the right strategy, you can make huge profits.
So let us first understand what an option trading strategy.
Option trading strategies are created by buying calls or puts or selling calls & puts or a combination of both, with the objective of limiting losses and making unlimited profits.
Here it is very important to understand the call and put option before the strategy . With this, you can trade in the market by understanding your trading objective and the benefits and risks arising out of it.
Presenting to you are 5 types of option trading strategies that every trader should know and can use to make their options trading success in the stock market!
Everyone waits for the bull market and wants to earn money in the rising market but even if the market is falling down you can still earn money just you need to know the right strategy.
So here we will talk about the same strategy, by which you can earn money even in a falling market, in a rising market and even if the market is not going anywhere, even if it is going in a straight direction. All that is needed is to have complete knowledge of the strike price and choose the right expiry ( what is expiry in share market ) of the option in which you are trading.
Of all the spread strategies, the bull call spread is the most popular. This strategy works when you have a moderately bullish view on the stock/index.
The bull call spread is a two leg spread strategy that traditionally consists of ATM and OTM options . However, you can create a bull call spread using other strike prices as well.
To create a bull call spread –
Buy 1 ATM call option (Leg 1)
Sell 1 OTM call option (Leg 2)
When you do this make sure to-
All the strikes should belong to the same stock or index and have the same option expiry. Let us understand this with an example of option trading :
Outlook – Medium Bullish (market is expected to go up but not much bullish)
Date – 21 December 2021
Nifty Spot – 17010
ATM – 17000 CE, Premium – Rs. Rs 90/- Buy
OTM – 17100 CE, Premium – Rs 40/- Sell
Buy 17000 CE by paying Rs.90 as premium .
Also sell 17100 CE call and get 40 as premium.
Since 17100 CE is the premium you received, here it is the difference between the Net Cash Flow Credit and Debit i.e. 40 – 90 = 50 .
Normally there is always a ‘net debit’ in a bull call spread, hence the bull call spread is also called a ‘debit bull spread’.
Now let us see what are the possible advantages and disadvantages for an option trader from this strategy .
Cost of spread = -50
Spread range : 17100 (higher strike price) – 17000 (lower strike price) =100
Nifty Lot Size = 50
Max Loss : -50 (Cost of Spread) * 50 (Nifty Lot Size) = – Rs 2500
Maximum profit: 100 (spread range) – (cost of spread) = Rs 50 * 50 (Nifty lot size) = Rs 2500
If you are a little less bullish on the stock market and to want trade with less risk, then the bull put spread strategy is perfect because this strategy helps you earn more profits by reducing your risks.
This is one of the bullish option trading strategies that option traders can implement when they are a little less bullish on the stock market.
The bull call spread is a two leg spread strategy that traditionally consists of ITM and OTM options. However, you can create a bull call spread using other strike prices as well.
Here also you have to keep in mind that both the puts should be on the same stock or index and have the same expiry date.
Bear call spread is also a two leg spread strategy which traditionally consists of ITM and OTM call options. However, you can also create a spread using other strikes. Remember, the higher the spread between the two selected strikes, the higher the profit potential.
This spread is very similar to the bull call spread is also easier to implement. A bear put spread should implemented when the market outlook is the moderately bearish, ie you expect in the market go down in the near term, while the same time you don’t expect it to go down very much.
If you have to quantify ‘minor bearish’, then 4-5% market fall is expected. If the market is expected to correct (go down), then applying the bear put spread will result in a marginal profit, but on the other hand if the market goes up, the trader can exit the market with limited losses.
Traders would implement this strategy when the market outlook is moderately bearish, i.e. when traders are expecting the market to go down, but not too much.
This strategy consists of buying 1 ITM (In The Money) put option and selling 1 OTM (Out of the Money) put option. It should be noted that both the puts should be on the same stock or index and on the same expiry date.
Long straddle is one of the best strategy for option trader. If the trader feels that there is volatility in the market and he is not able to decide which side the market is going to move, that is, he knows that the market will either go up very fast, it will go down very fast, but He does not know clearly where the market will go.
Then in that condition the option trader creates a long straddle. With this strategy, in whatever direction the market goes, it will be profitable and it will get maximum profit.
Traders use this strategy mostly on an event because at that time we do not know whether the market will consider that event as a positive note or a negative note, so we make a long straddle so that in whatever direction the market goes, we get maximum profit. .
This strategy consists of buying 1 atm call option and 1 atm put option. It should be noted that both the options should belong to the same underlying, same expiry and same strike.
Options trading is generally associated with high risk, traders have several basic strategies with limited risk. And hence risk averse traders can also use options to enhance their returns. However, it is always important to understand the downside of any investment so that you know what you stand to lose and whether it is worth the potential gains. Follow the rule of option trading to make profit in options .
Whatever strategy you use in trading, first of all make sure that it is very important to understand which strategy you have to use, in which market condition, which strategy you have to apply. In the article Option Trading Strategies, we have made you aware of the West Option Trading Strategy, understanding which you can move forward in your trading journey.
If you are looking for the right stock broker for options trading or investing in the share market, contact us and we will help you find the right broker and open an account with :
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