Stock options trading strategy
5 Options Trading Strategies For Beginners |
The advantage of the Strangle over the straddle is that it lowers the cost of the buyer of the Strangle and expands the range of profitability for the seller of the Strangle. That is the reason, strangles are a lot more popular in practice compared to a straddle. Illustration 5 : A trader expects the stock of TCS to become volatile in the next 15 days but is not sure of the direction.
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Just as the collar is an extension of covered call, the butterfly spread is an extension of short straddle. You will recollect that downside risk in short straddle is unlimited if market moves significantly in either direction up or down. To put a limit to this downside, along with short straddle, trader buys one out of the money call and one out of the money put.
Buying Options vs Selling Options
The butterfly spread is a closed strategy but you need to remember that there are 4 legs to initiation of the Butterfly Spread and 4 legs to closure. That will significantly add to the costs of the strategy, when you consider the transaction and statutory costs. Hence butterfly spread is used sparingly by traders. We have seen directional strategies, volatile strategies and we have also seen range bound strategies. In the last section we shall look at spread strategies. That sounds complicated but actually it is quite simple. In a nutshell, these spread trades are about limited profit and limited loss positions.
Broadly, such spreads are categorized into three sections as:. Vertical spreads are created by using options having same expiry but different strike prices. Further, these can be created either using calls as combination or puts as combination. Also, such vertical spread can be bullish vertical spreads or bearish vertical spreads.
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Bull call spreads and bear put spreads are two of the most popular vertical spreads and we shall dwell in these two strategies in greater detail later. Horizontal spread involves same strike, same type but different expiry options. For example, buying a Nifty 11, August call and selling an 11, September is an example of horizontal spread. This is also known as time spread or calendar spread.
It is not possible to draw the pay off chart as the expiries underlying the spread are different. Diagonal spread involves combination of options having same underlying but different expiry as well as different strikes. Here again the two legs in a spread are in different maturities and it is not possible to draw pay offs. These diagonal spreads are more complicated and are therefore more suitable for the OTC market. Bull call spread is a moderately bullish strategy where you buy a lower strike call option and sell a higher strike call option of the same expiry.
Here, like in any vertical spread contract, the maximum profit and the maximum loss are fixed and hence it is a closed strategy. Illustration 6 : Trader Buys an August call option of a stock at Rs. This is an example of a bull call spread. Let us see how the payoffs work. Bear Put spread is moderately bearish strategy where you buy a higher strike put option and sell a lower strike put option of the same expiry. Illustration 7 : Trader Buys an August put option of a stock at Rs.
This is an example of a bear put spread. Tradebulls Securities is one of the leading Indian financial corporations aimed to make trading easier for everyone, even for those who are from a non-trading background. Tradebulls is here for you with its professionally trained team to offer knowledge and guide you through the same. Existing User. New User. Sign Up. You are a registered user. Quality The Quality Score is based on company's financial and management quality and long term performance. Value The Valuation Score tracks how expensive the stock is versus its peers.
Technical The Technical Score tracks the bullishness or bearishness of a particular stock relative to the entire stock universe. Search So what exactly are you looking for? Let us know and we will help you find the best answer. Broadly, options strategies can be divided into 6 categories as under: Bullish strategies Bearish strategies Moderately bullish strategies Moderately bearish strategies Volatile strategies Range bound strategies In the chapter we shall look at various strategies and for greater clarity we will classify them and bucket into one of the above strategy baskets.
Protective Puts, Covered Calls and Collars These are the 3 most basic strategies that are used on a regular basis. Protective Put strategy Assume that you purchased a stock to hold from a long term perspective. The maximum loss on the protective put strategy as we can see is Rs. That is the sum of the gap between spot price and strike price plus the option premium of Rs. However, low the stock price goes, you can never lose more than Rs.
That level arises at a price of Rs. That can be interpreted as the purchase price of Rs. Above the BEP, the profits for the trader are unlimited. By just paying a premium of Rs. Covered Call strategy While the protective put is a limited risk strategy, the covered call is not exactly a limited risk strategy. The maximum profit on the covered call strategy as we can see is Rs. That is the sum of the gap between strike price and spot price plus the option premium of Rs.
However, high the stock price goes, your profit ceiling is Rs. Maximum profit always arises at the strike price at which call is sold. Above that, any profit on spot position is negated by losses on the call option sold. However, on the downside, as you can see from the table above, the losses can be unlimited.
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Hence this strategy must only be adopted on stocks that have strong fundamentals and where you can hold for the long term. The breakeven point for the covered call strategy is Rs. Below , your net effective losses on the spot position start increasing.
Collar strategy In the covered call strategy we saw that the downside risk was open. The maximum loss on the collar strategy, as can be seen in the table above is Rs. However, low the price of the stock goes, your total loss can never be more than Rs. How is this Rs. But this loss of 15 gets reduced by the Rs. Hence maximum loss on the Collar is limited to Rs. On the upside the maximum profit will be limited to Rs.
How is this maximum profit arrived at? You first consider the gap between the call strike price and purchase price To that you add the net premium received The sum is Rs. The breakeven point for the collar strategy is Rs. From the purchase price of Rs. As long as the stock price is above Rs. Straddles, Strangles and Butterfly Spreads Option strategies are fine when you have a view on the direction of the market. Straddle strategy The straddle strategy involves two options of same strike prices and same maturity.
Long on straddle is a volatile strategy and it makes a loss only when the stock remains stagnant.
The maximum loss on the long straddle strategy is Rs. Once that premium is covered, then the price movement becomes profitable either way. The straddle being a volatile strategy it has two breakeven points. There is a lower breakeven point at Rs. If TCS moves either below Rs. The last column is the reverse straddle which is a range bound strategy. The payoff of a short straddle is exactly the reverse of a long straddle.
Beyond the break even limits, the losses can be unlimited in a short straddle. You need to be cautious about short straddles. Strangle strategy The strangle strategy involves two options of different strike prices and same maturity. TradeWise Advisors, Inc. Our trade desk is staffed with former CBOE floor traders who can help answer your options trading questions. Call us at day or night. With features like Options Statistics, Options Probabilities, and the Analyze Tab, our 1 rated trading platform thinkorswim Desktop 1 and the thinkorswim Mobile App can help position you for options trading success.
We put the tools you need to make more informed options trading decisions, quickly and efficiently, all in one place. Refine your options strategy with our Options Statistics tool. Look at the put-call ratio to identify the potential direction of the underlying security.
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And use our Sizzle Index to help identify if option activity is unusually high or low. Weigh the potential risk of your trade against the potential reward using our Option Probabilities tool built right in the option chain. Small trades: formula for a bite-size trading strategy. Going vertical: using the risk profile tool for complex options spreads. Options strategy basics: looking under the hood of covered calls. Home Investment Products Options. Now introducing. Learn more. A superior option for options trading Open new account.