Options Trading Strategies
Options are derived from the underlying stocks/instruments which gives the right to buyers to buy or sell a security at a particular price. In this article we will study about different option strategies by which you can make in option market.
Today options are becoming the fastest way to invest with small amount with minimum risk than equity for investors. There are two popular strategies which is adopt by most of the investors.
• When market is bullish, they buy a Call option.
• When market is bearish, they buy a Put option.
Above mention strategies are useful in a certain market condition because sometimes market moves in a narrow range or sideways. This strategy works well when market movement is sharp. As option contract is slower than the underlying stocks/instruments. There are several strategies which are described for option trading but all strategies are fit for all market situations.
Here are some of the strategies which may help you to make money:
Covered call strategy includes selling a call option with a twist. You can sell a call but also buys the underlying option to generate income in the form of options premiums.
For example: Stock TCS is trading at Rs 100 per share, and a call with strike price of Rs 500 which expiring in four months trading at Rs 10. The contract pays a premium of Rs 200, or one contract Rs 10*200 shares represent per contract. You can buy 2,000 shares of stock for Rs 20,000 and sells one call to receive Rs 200.
2. Long Call (Buying Calls)
A long call strategy gives you the right to buy the underlying stock at a certain strike price to exceed the strike price by expiration.
For example: Stock TCS is trading at Rs 10 per share, and a call with a strike price of Rs 20 and expiring in four months is trading at Rs 100. The contract costs Rs 50, or one contract Rs 100*50 shares represent per contract.
3. Long put (Buying Put)
A long-put strategy gives you the right to sell the underlying instrument at a particular strike price. The only way to get benefit when the market movement is downward is to sell stock short. But in this condition, there is unlimited risk if the stock price rises. Buying put strategy works exactly opposite of call option.
4. Married Put
Married put strategy can be defined as an option strategy where you can buy an at-the-money put option while simultaneously buying an equivalent number of shares of the underlying instrument.
This strategy is an effective way to protect against excessive loss. You can compare it to the covered call. This strategy might work in a low volatile market.
5. Protective Puts
This strategy helps to manage your risk in option trading by limiting your losses in unexpected market movements. Protective put strategy helps you to buy put option contract of stocks you currently own.
The purpose of this strategy is to hedge the risk involved when market moves in a sudden way.