Options provide 3 key benefits - increased cost efficiency, potential to deliver better returns and act as a strategic alternative. Ask any options investor, and they are always on the hunt for the best options strategy. There are over 400 options strategies that you can deploy. But how to spot a winning strategy? It all depends on your comfort level and knowledge. Let us have a good overview of some of the popular options strategies. Read on.
There are many options strategies that you will use over the period of time in markets. But, there are roughly three types of strategies for trading in options. Firstly, you have the bullish strategies like bull call spread and bull put spread. Secondly, you have the bearish types of strategy such as bear call spread and bear put spread. Thirdly, there is the neutral options strategy such as Long and Short Straddle, Long and Short Strangle etc. Before you begin reading about options strategies, do open a demat account and trading account to be ready. You may never know when you get an opportunity to try out a winning strategy.
A bull call spread is an options trading strategy that is aimed to let you gain from a index's or stock's limited increase in price. The strategy is done using two call options to create a range i.e. a lower strike price and an upper strike price. A bull call spread can be a winning strategy when you are moderately bullish about the stock or index. If you believe that the stock or the index has great potential for upside, it is better not to use a bull call spread.
In a bull put spread options strategy, you use one short put with a higher strike price and one long put with a lower strike price. Remember both puts have the same underlying stock/index and the same expiration date. Like the bull call spread, a bull put spread can be a winning strategy when you are moderately bullish about the stock or index. If both bull call spread and bull put spread are similar, then how do you benefit if they are both top gainers in terms strategy utility? The difference lies in the fact that the bull call spread is executed for a debit while the bull put spread is executed for a credit i.e. money flows into your account as soon as you execute trade.
A call ratio backspread is an options strategy that bullish investors use. This strategy is used when investors believe the underlying stock or index will rise by a significant amount. The call ratio back spread strategy combines the purchases and sales of options to create a spread with limited loss potential, but importantly, mixed profit potential. The call ratio back spread is deployed for a net credit. This is a winning strategy if you are okay with making limited money if the stock/index price goes down, while there is huge profit if the stock/index price goes up. Remember, the loss is pre defined at all times.
In a Bear Call Ladder strategy is a tweaked form off call ratio back spread. So, you implement this strategy when you are very bullish on the stock/index. In a bear call ladder, the cost of purchasing call options is funded by selling an ‘in the money’ (ITM) call option. This options strategy is deployed for net credit, and the cash flow is better than in the call ratio back spread. To gain from this strategy, the range in which the stock/index moves has to large.
The Synthetic Long and Arbitrage options strategy is when an investor artificially replicates a long futures pay off, using options. The trick involves simultaneously buying at-the-money (ATM) call and selling at-the-money (ATM) put, this creates a synthetic long. An arbitrage opportunity is created when a synthetic long and short futures yields a positive non-zero profit & loss (P&L) upon expiry. Investors are advised to execute the arbitrage trade only if the P&L upon expiry makes sense after adjusting for trade expenses. Open a demat account with Nirmal Bang and use special options strategies today to make a profit.
A bear put spread strategy consists of buying one put and selling another put at a lower strike. This is to offset a part of the upfront cost. The options strategy consists of buying one put in hopes of profiting from a decline in the underlying stock/index. But by writing another put with the same expiration, at a lower strike price, you are making a way to offset some of the cost. This winning strategy requires a net cash outlay or net debit at the outset.
A bear call spread, also called bear call credit spread, is used when an investor anticipates a decline in the price of the underlying stock/index. A bear call spread is done by buying call options at a specific strike price. At the same time, the investor sells the same number of calls with the same expiration date but at a lower strike price. In this way, the maximum profit can be gained using this options strategy is equivalent to the credit got when starting the trade. This approach is best for those with limited risk appetite and satisfied with limited rewards.
The put ratio back spread is also a bearish strategy in options trading. It involves selling a number of put options and buying more put options of the same underlying stock expiration date, but at a lower strike price. The put ratio back spread is for net credit. This is a winning strategy is when your outlook on the stock/index is bearish. The put ratio back spread potentially makes limited money if the index/stock price goes up, but can give potentially unlimited profit when the index/stock price goes down.
The word straddle in English means sitting or standing with one leg on either side. As options strategy, a long straddle is a combination of buying a call and buying a put --- importantly both have the same strike price and expiration. Together, this combination produces a position that potentially profits if the stock makes a big move, either up or down. The long straddle is one of the strategies whose profitability does not really depend on the market direction. So, it is a market neutral options strategy. Do remember that a long straddle can be a winning strategy if its implemented around major events, and the outcome of these events is different than general market expectations.
A short straddle is an options strategy where you will have to sell both a call option and a put option with the same strike price and expiration date. This approach is a market neutral strategy. The short straddle is useful when you believe the underlying stock/index will not move significantly higher or lower over the lives of the options contracts. This signifies that the investor is placing a bet that the market won't move and would stay in a range. SImilar to long straddle, a short straddle should be ideally deployed around major events.
A strangle is a tweak of the straddle. This is done to lower the cost of trade implementation. A strangle requires you to buy out-of-money (OTM) call and put options. The short strangle is the exact opposite of the long strangle. You need to sell OTM call and put options which are at the same distance from the ATM strike price. This is a delta neutral options strategy. It is insulated against any directional risk.
You have read about popular options strategies. As an option enthusiast, you are regularly tracking Top Losers, NSE BSE Top Gainers and metrics like Open Interest (OI). To succeed in the options field, here are the things you need to know.
You have read about popular options strategies. As an option enthusiast, you are regularly tracking Top Losers, NSE BSE Top Gainers and metrics like Open Interest (OI). To succeed in the options field, here are the things you need to know.