An options trader has a wide array of instruments to choose from to benefit from any situation. In this chapter, we talk about how to navigate through this problem of plenty.
The vast array of options strategies often adds to the confusion of those wanting to begin option trading. Here are some steps to help you pick the right strategy.
An entry level strategy for many options traders is the long call strategy. A trader will create a Long Call trade when he expects the underlying to be bullish.
A Short Call Option is a bearish strategy where the trader makes money when the asset price falls. Let's look at this strategy in detail and understand what you need to know before taking a short call trade.
Long Put is an entry-level strategy for options traders with a bearish view of the market. It is an entry level trade for hedgers as well
Short Put refers to a trade when the trader sells or writes a put option intending to make money when the underlying rises.
A synthetic call strategy is a hedging strategy, used to protect the portfolio from a sudden fall, while a synthetic put is created to provide insurance cover to a short position. The Long Combo is a low-cost strategy to create a long position while leaving room for the underlying to play without hampering the portfolio's performance.
A covered call is used by traders who feel the market will remain flat or fall to earn from the options market without selling the stocks in the portfolio. A Covered Put strategy is used when they expect the market to be neutral to bearish.
A straddle is a neutral options strategy that involves simultaneously buying a call and a put option of the same underlying having the same strike price and the same expiry date.
A strangle strategy is a two-legged non-directional strategy built using out-of-the-money (OTM) strangles, unlike straddle where at-the-money (ATM) options are at play.
Iron Condor is another non-directional strategy but unlike straddle and strangle, which are two-legged, Iron Condor is a four-legged strategy.
A Bull Call Spread is created by buying a call option and selling another call option of the same underlying asset and expiration date but a higher strike price. A Bull Put Spread is created by selling a put option and buying another put option of the same underlying asset and expiration date but a lower strike price.
A Bear Call Spread is created by selling a call option and buying another call option of the same underlying asset and expiration date but a higher strike price. A Bear Put Spread is created by buying a put option and selling another put option of the same underlying asset and expiration date but a lower strike price.
Butterfly strategy is a non-directional strategy for when the market movement is expected to be flat. Butterflies are good strategies when volatility is expected to fall after an event.
Ratio Spread is an extension of the spread strategy. It combines long and short options of the same type. The type of option used to construct the Ratio Spread determines its direction.
Spreads are generally a play of two option legs. The name of the strategy depends on how these options are placed. Traders use two types of spreads – Vertical Spreads and Horizontal Spreads.
Diagonal and double diagonal spreads have limited risk and reward potential. They are created when small movements are expected in the market.
Even when an options trade works favourably or unfavourably, there are ways to adjust positions to save on the trade or extract the most out of it without too much additional cost.