What exactly is an option trading strategy?
An option trading strategy is a hybrid combination of futures and options, or of two or more different options, that results in a product with defined risk-returns. Option strategies are possible due to the unique nature of options, which are volatile in nature.
Options strategies are generally classified into six categories, which are as follows:
- Bullish strategies
- Bearish strategies
- Moderately bullish strategies
- Moderately bearish strategies
- Volatile strategies
- Range bound strategies
In this post, we’ll look at spread techniques. Spreads are created by combining options with different strike prices and/or maturities that are based on the same underlying and type (call/put). That may appear to be difficult, but it is actually fairly straightforward. In a word, spread trades are limited-profit and-loss positions.
The three most common spreads are:
Vertical spreads are created by combining options with various strike prices but the same expiry date. Furthermore, they can be made using a combination of calls and puts. These vertical spreads can either be bullish or negative. We’ll go through bull call and bear put spreads, which are two of the most common vertical spreads.
Horizontal spreads have the same strike, type, and expiration dates as vertical spreads.
Buying a Nifty 15,000 July call and selling an 15,000 August call creates a horizontal spread. This is also known as a calendar spread or a time spread.
A diagonal spread is made up of options that have the same underlying but various expiry dates and strike prices. The two legs of a spread have different maturities, hence there are no payoffs. These diagonal spreads are more sophisticated and, as a result, better suited to the over-the-counter market.
Bull Call Spread
A bull call spread is a bullish strategy that involves buying a lower strike call option and selling a higher strike call option with the same expiry date. As with any vertical spread contract, the maximum profit and maximum loss are fixed in this contract, making it a closed strategy.
For instance, assume you pay Rs.35 for a July 1100 call option on a stock and Rs.17 for an August 1200 call option on the same stock.
The maximum loss in the aforementioned bull-call spread is Rs.18. This is the net premium paid for the approach (35 -17). This amount can never be exceeded as a total loss.
The maximum profit is Rs.82, calculated by subtracting the strike difference (1100-1000) from the net premium of Rs.18.
The breakeven point(BEP) for this bull call spread is Rs.1018 (lower strike + net cost), and the maximum profit occurs at the upper strike. The payoff is constant both above and below the upper strike.
Bear Put Spread:
A bear put spread is a bearish strategy that involves buying a higher strike put option and selling a lower strike put option with the same expiration date. The maximum profit and maximum loss are fixed, as with every vertical spread contract, showing that this is a closed strategy.
For instance, assume you pay Rs.20 for a July 1100 put option on a stock and Rs.6 for a July 1000 put option on the same stock.
We discussed option trading strategies in this article. Trading strategy options are extremely complex, and to avoid significant losses, you’ll need plenty of practise and some paper trading. A forex trading technique will be discussed shortly.
We will cover more deeply below topics and supply pdfs
- most successful options strategy – FII players take mostly sell side Strategies and spreads and whereas Retail traders look for Buy side strategies
- best option trading strategies for indian market pdf – will be published upon request. please comment for requesting.
- guaranteed profit option strategy – There is no one option strategy in the world which can profit all the time, so all of them have success and failure percentages.
- option strategies with examples: Above some examples are given but if you need more then please comment and request for us to work on more examples.
- option trading strategies for beginners : Here we covered all strategies but feel free to request more if unclear.
- options trading strategies – Covered above are mostly used strategies.
- options trading strategies pdf – Will be published upon request. Please comment and request.
Please refer to this article for full list of Option trading strategies