Option Strategies Explained with Modern Algos
Option Products were firstly launched by National Stock Exchange (NSE) in the year 2001, However, with various recent changes in the Intraday Exposure/Leverage by SEBI (Regulatory Body), Options Trading and Strategies Based Trading caught up the eyes of Retail Traders as well and their participation has been on a tremendous upsurge.
One may have a question, WHY? – Primary reason, what I could figure out is – Hedge Benefit, if you devise a Spread or Hedge Strategy; then Margin Requirement is as low as 20K (not in all the strategies), and that had encouraged the Retail Traders to venture into Options Trading. Other important factors could be, one knows the RISK involved at the time of entering into a Trade and that helps to manage it more efficiently than other Trading Products available in the Indian Capital Market.
What are the Commonly Used Option Strategies?
Bull Call Spread
- Upside Trend bias
- Don't want to have unlimited loss
- Wants to keep the Investment with Hedge Benefit
When to do?
- Upside Breakout
- Bullish Mindset
- Buy the nearest Call Option to Spot Price
- Sell higher strike prices (OTM) from the Spot Price
- To ride the uptrend with the predefined loss
Bear Put Spread
- Downside Trend bias
- Don't want to have unlimited loss
- Wants to keep the Investment with Hedge Benefit
When to do?
- Downside Breakout
- Bearish Mindset
- Buy nearest Put Option to Spot Price
- Sell Lower strike prices (OTM) from the Spot Price
- To ride the downtrend with the predefined loss
Bull Put Spread
- Upside Trend Bias
- Risk Protection with limited loss
- Credit Strategy - Net Premium is receivable
When to do?
- Upside to Neutral
- Time decay Approach
- Buy nearest Put Option to Spot Price
- Sell Higher strike prices (ITM) from the Spot Price
- To benefit from Falling Prices or Neutral Market
Bear Call Spread
- Downside Trend Bias
- Risk Protection with limited loss
- Credit Strategy - Net Premium is receivable
- Downside to Neutral
- Time decay Approach
- Buy nearest Call Option to Spot Price
- Sell lower strike prices (ITM) from the Spot Price
- To benefit from Falling Prices or Neutral Market
Short Straddle
- Profiting by way of decrease in Option Value due to Time
- Neutral OR Consolidation outlook
- Time effective strategy, less time in the position.
- Neutral to Consolidation
- Time Decay Approach
- Sell Nearest Strike Prices (ATM) for both Call and Put Options
- To benefit from the time value due to Neutral Market
Short Strangle
- To benefit from the Sharp Price Action
- Usually NO Break Out on Either Side of the Market
- Trading in the larger range
- Increasing Volatility Scenario
- Range basis outlook
- IV is expanding
- Sell Higher Call Option (OTM) to Spot Price
- Sell Lower Put Option (OTM) to Spot Price
- To benefit from the larger price action but with in the range
Iron Butterfly
- To benefit from the Consolidation in the Market
- Trading in the expanded range
- Low Volatility Scenario
When to do?
- Consolidation or Tight Range Move Outlook
- Volatility is low in the market
- Sell Call and Put Option at the Spot Price
- Buy Higher Call Option (OTM)
- Buy Lower Put Option (OTM)
- Delta Neutral Strategy to benefit from the tight range move
Iron Condor
- To benefit from an indecisive trend
- Trend neutral strategy in a defined range
- To benefit from the Theta decay
When to do?
- No Trend Territory Zone
- Time decay approach
- Sell Call and Put Options slightly away from Spot Price (OTM)
- Buy Higher Call Option from the Sell Call Strike (OTM)
- Buy Lower Put Option from the Sell Put Strike (OTM)
- Delta Neutral Strategy to benefit from the indecisive trend in the market
Comments
Post a Comment