Introduction
Options trading offers immense potential for profit, but without the right strategies, it can lead to significant losses. In this article, we'll explore five proven options trading strategies that have stood the test of time in the Indian stock market.
1. Covered Call
Overview: A covered call involves holding a long position in an asset and selling a call option on the same asset to generate income.
When to Use: Ideal when you expect the underlying asset to have neutral to slight bullish movement.
Example: If NIFTY is trading at ₹18,000, you might buy NIFTY futures and sell a ₹18,200 call option. If NIFTY remains below ₹18,200, you keep the premium received from selling the call.
Pros: Generates additional income, reduces cost basis of the underlying asset.
Cons: Limited profit potential due to the obligation to sell the asset at the strike price.
2. Protective Put
Overview: A protective put involves holding a long position in an asset and buying a put option on the same asset to protect against downside risk.
When to Use: Suitable when you expect the underlying asset to have bullish movement but want to protect against potential downside.
Example: If BANKNIFTY is trading at ₹42,000, you might buy BANKNIFTY futures and purchase a ₹41,800 put option. If BANKNIFTY falls below ₹41,800, the gains from the put offset the losses in the futures position.
Pros: Provides downside protection, unlimited upside potential.
Cons: Cost of purchasing the put option reduces overall profitability.
3. Long Straddle
Overview: A long straddle involves buying both a call and a put option at the same strike price and expiration date, betting on significant price movement in either direction.
When to Use: Best used during periods of high volatility or before major events like earnings announcements.
Example: If NIFTY is trading at ₹18,000, you might buy both a ₹18,000 call and a ₹18,000 put option. Significant movement in either direction can lead to substantial profits.
Pros: Unlimited profit potential, benefits from large price movements.
Cons: High cost due to purchasing both call and put options, requires significant movement to be profitable.
4. Iron Condor
Overview: An iron condor involves holding a combination of bear call spreads and bull put spreads, aiming to profit from low volatility in the underlying asset.
When to Use: Suitable when you expect the underlying asset to trade within a specific range.
Example: If NIFTY is trading at ₹18,000, you might sell a ₹17,800 put, buy a ₹17,600 put, sell a ₹18,200 call, and buy a ₹18,400 call. Profit is maximized if NIFTY remains between ₹17,800 and ₹18,200.
Pros: Limited risk and reward, benefits from low volatility.
Cons: Requires precise market movement to be profitable, potential for loss if the underlying asset moves significantly.
5. Bull Call Spread
Overview: A bull call spread involves buying a call option at a lower strike price and selling another call option at a higher strike price, both with the same expiration date.
When to Use: Ideal when you expect moderate bullish movement in the underlying asset.
Example: If NIFTY is trading at ₹18,000, you might buy an ₹18,000 call and sell an ₹18,200 call. Profit is limited to the difference between the strike prices minus the net premium paid.
Pros: Reduced cost compared to buying a single call, limited risk and reward.
Cons: Limited profit potential, requires precise market movement.
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