This strategy is implemented by a trader when he is neutral – moderately bullish in the near-month contract and bullish in the mid-month contract. It involves sale of 1 Near-Month OTM Call Option and buying of 1 Mid Month ITM Call Option.
Suppose NIFTY is trading at 5300 odd points, Mr. X is neutral for the near-month contract and bullish for the mid-month contract. He applies Diagonal Bull Call Spread Strategy where he will sell 15400 Near-Month OTM Call Option for a premium of Rs.25 and buy 15200 Mid-Month ITM Call Option at a premium of Rs.235. His net investment will be Rs.10500. [(235-25)*50]
Case 1: At the Near-Month expiry if NIFTY closes at 5000, then Mr. X will get to keep the premium amount of 5400 Near-Month OTM Call Option of Rs.1250. (25*50) At the Mid-Month expiry if NIFTY closes at 4900, then Mr. X will make a loss on his premium amount paid for 5200 Mid-Month ITM Call Option i.e. Rs.11750. (235*50) His net payoff will result in a loss of his entire investment value i.e. Rs.10500. [(235-25)*50]
Case 2: At the Near-Month expiry if NIFTY closes at 5200, then Mr. X gets to keep the premium amount of 5400 Near-Month OTM Call Option of Rs.1250. (25*50) At the Mid-Month expiry if NIFTY closes at 5300, then Mr. X will make a loss on the 5200 Mid-Month ITM Call Option of Rs.6750. [(100-235)*50]
His net payoff will result in a loss of Rs.5500. (6750-1250)
Case 3: At the Near-Month expiry if NIFTY closes at 5400, then Mr. X will get to keep the premium amount of 5400 Near-Month OTM Call Option of Rs.1250. (25*50) At the Mid-Month expiry if NIFTY closes at 5500, then Mr. X will make a profit on 5200 Mid-Month ITM Call Option of Rs.3250. [(300-235)*50]
His net payoff will result in a profit of Rs.4500. (1250+3250)
When you buy an options contract, it gives you the right but not the obligation to buy or sell an underlying asset at a set price on or before date. Call option grants you the right to buy a stock and put option grants you the right to sell a stock.
Relative Strength Index (RSI) is an indicator used in technical analysis to check the bullish and bearish momentum. It is generally used by technical traders and value oscillates between 0 to 100, value below 30 indicates that the option contract is oversold and value above 70 indicates that option contract is overbought.
To trade in options, one must research before buying. The options trading is not as riskier as trading in individual issues of the stocks or bonds. If one does the trade in the appropriate manner then it can be more lucrative.
There are various indicators to figure out whether the option contract has been adjusted or not. Some of them are:
a) The option is either too cheap or too expensive.
b) There are various two symbols for the options of same month and strike price.
c) The liquidity of the adjusted options is less than the options.
When an individual buys an options contract then they don’t need to pay the margin as the loss incurred is limited. An individual needs to pay a premium amount. The loss will be further limited to the premium value.
At the time of selling the option contract, one needs to pay a margin need as there can be a chance of the unlimited loss and limited profit.
The long dated options offers various benefits such as:
a) It provides the long-term exposure in the stock or index to a trader.
b) The long-term hedging against the equity position.
c) It further minimizes the risk by allowing the traders to make investment for longer period of time.
Naked option trading is also known as uncovered option trading. It’s a strategy of selling an option without holding position in the underlying. It also refers to an option sold without any previously set aside shares to fulfil the option obligation at expiration.
Naked option strategy run the risk of large loss from rapid price change before expiration. Naked call and put option that are exercised to create a short and long position in the seller’s account respectively.
Every trader has its own strategy to earn from the market. But there are many technical strategies available through which one can understand the trend of market.
• One should understand the nature of market whether it is bullish, bearer or neutral.
• Before investing, check the past trend of stocks.
• Evaluate yourself.
• Take experience from the market.
• Pick your strategy wisely.
The traders lose money because they try to hold the options that are too close to the expiry. So, if you are getting good price then it is better to exit at a profit when there is time value left in the option.
Paired Option contract is the new facility that allows a trader to take positions on 2 different contracts belonging to the same underlying asset at the same strike price and expiry date. This contract allows a trader to take two different positions on the same option in single order.
A Sell to Open refers to the various instances in which an option investor initiate or open an option trade by selling or creating a short position in an option. It allows the option seller to receive the premium paid by the buyer on the opposite side of the transaction.
Buying or selling the call or put options depends on the market outlook of an individual. If you think that market will rise in this month then you must consider the “Buy Call Option” or “Sell Put Option” and vice versa.
It is an Options Trading Strategy in which a trader will buy and sell multiple option of the same type either call or put with the same underlying asset. Mainly there are three types of Option spread strategy.
• Vertical Spread Strategy.
• Horizontal Spread Strategy.
• Diagonal Spread Strategy.
Traders can use these spreads to lower their cost of investment as you pay premium for buying option and receive premium on selling option.
Option is a contract that gives the holder the right to buy or sell the underlying asset that is obligated to honour the contract at a predetermined price and time. It requires less margin. A future is a contract that is made buy or sell the underlying asset at predetermined price and time. It requires higher margin.
Bull call spread is a strategy which involves two positions of buying a call and selling a call option. Generally, it is used by traders, when they are bullish in the market. Profit and loss are limited in this strategy.