What is Options Trading? What are the different Strategies for option Trading?
In today’s market scenario Option trading is very popular but lack of knowledge and advisory support people lose hard-earned money. Here Traders can earn good returns at a low premium amount. They can manage the risk level by taking the option contract of In the money, at the money, and out of the Money which is vice versa for the call and put option.
When we buy an option with the expectation of a rising value it is called a Call Option and when we buy an option with the expectation of a falling value it is called a Put Option. There is always a Contract of weekly or Monthly options. If your expectations go wrong then the premium of the option may become zero. So it is good to book loss if it is not as per expectation. Stop loss protect our premium going to become Zero.
There is a trading called Option Writing where Call or put are sold at a premium and bought at the correct price. Here the margin money required is almost equal to a future contract it is called almost safer trading than normal option trading Here there is a chance of booking a good amount of profit but at the same time, risk also increases if the expectation is reversed.
Following are the Strategies that we can use during Option Trading
Covered Call: It is a very simple Strategy where we buy a Future Contract or the Same number of shares and sell the one Call expecting a Strike Price. Here we can cover our loss with a call If the price is Increasing still we can get a very good profit.
Married Put: In this strategy when we buy a futures contract or the same number of shares and in cover we buy one put so we protect the downside fall. On the rise, we can get good profit but we lose the premium of put.
Bull Call Spread: Here a Trader buys a call option at a certain Strike price and sells the same quantity of Call options at a Higher Strike price. This type of Strategy is used when a trader is very bullish.
Bear Put Spread: This Strategy is used when a trader is bearish on the Market they Buy Put and in the same quantity, they sell the put at a lower Strike price.
Protective Collar: When a Trader has a long position in some stocks they can buy an OTM (Out of the Money) Put and Same time at the same premium they sell Call Option OTM (Out of the Money). Here they protect their downside fear of underlying assets.
Long Straddle: This Strategy is used when traders have underlying assets but are not sure which direction the market will move in that case they buy the same quantity of Calls and Put on the same strike price. In this case market moves upside they earn very good profits whereas in case the market falls at least they can earn through put premium.
Long Strangle: Long Strangle Option Strategy is used when a trader is expecting a very high move in either direction. They purchase out of the money call and out of the Money (OTM) put Option. A strangle is less expensive than a straddle.
Long Call Butterfly: In the last two Strategies we have seen that we purchased both call and put option contracts. Here we can plan with any one option call or put call Bull spread or Bear Spread. In a Long Call Spread, we buy one call In the Money (ITM) Call Option Sell two At the Money (ATM) Call options, and again Buy one of the Money (OTM) Call Options. This strategy is used when the Investor thinks of very low movement in the Market or underlying Asset in running Expiration Date.
Iron Condor: In this strategy, we have two options either we can go for Bull Put Spread or we can go for Bear Call Spread. In a Bull Put Spread, we sell one OTM Put and buy one Put of OTM at a lower strike price. In the case of a Bear Call Spread, we sell one OTM Call and Buy an OTM Call at a higher Strike Price. All option call and lying assets have the same expiration date. Normally this strategy is used when we expect higher returns at a low premium.
Iron Butterfly: Here in the Iron Butterfly strategy one trader Sell At the Money (ATM) Put and buy an Out of the Money (OTM) Put at the same time will sell an ATM (At the Money) Call and Buy Out of the Money (OTM) Call. This strategy is similar to butterfly spread where put and call both options are used. Here Maximum gains are made when Stock price remains on Strike price where Both Call and Put were sold. Maximum loss occurs when the stock moves above the long call strike or below the long put strike.
Conclusion
Here just like future Trading contracts available in lots but at different prices. Here only a premium amount has to be paid for trading in Index like Nifty, Bank Nifty, Fin Nifty, Equities, Currency, and different commodities like Silver, Gold, Natural Gas, Crude Oil, Zinc, Copper, Agree Products, etc. It is called High Risk and High-Profit Trading.
FAQ
Options trading is a financial strategy involving buying and selling options contracts that grant the right to buy (call option) or sell (put option) an underlying asset at a specified price within a set timeframe.
Beginner options traders should start with education, understanding call and put options, and learning basic strategies like Covered Call, Married Put, Bull Call Spread, Bear Put Spread, etc.
When we buy an option with the expectation of a rising value it is called a Call Option and when we buy an option with the expectation of a falling value it is called a Put Option
These 10 options trading strategies are best for every market condition
- Covered Call
- Married Put
- Bull Call Spread
- Bear Put Spread
- Protective Collar
- Long Straddle
- Long Strangle
- Long Call Butterfly
- Iron Condor
- Iron Butterfly
Stocks: These represent ownership in a company. When you buy a stock, you own a piece of the company and may receive dividends and voting rights.
Options: Options trading is a financial strategy involving buying and selling options contracts that grant the right to buy (call option) or sell (put option) an underlying asset at a specified price within a set timeframe.