Most stock market traders buy/sell options contracts, hoping a particular stock’s price will rise or fall. Unfortunately, this happens frequently, and the price barely moves.

The stock market’s unpredictability can be a double-edged sword for options traders. While it fuels potential profits from directional moves, it also wreaks havoc on strategies dependent on pronounced trends.

So, what happens when the bourses remain flat, and traders still want to make money?

Enter the Iron Condor strategy, a range-bound options trading strategy designed to thrive in uncertain market conditions.

Read this article as a guide, digging deep into the iron condor strategy and arming yourself with newfound confidence while negotiating the market’s choppy waters.

What Is an Iron Condor Strategy?

An iron condor is a directionally neutral options trading strategy that helps traders profit from relatively stable or sideways-moving stock markets. It aims to extract profits when the stock remains range-bound as the option’s expiration date inches closer.

The iron condor strategy is a four-legged approach that involves trading two call options (one long and one short) and two put options (one long and one short). All these trades happen at different strike prices but with the same expiration date.

Unlike directional plays that gamble on upward climbs or downward plunges, an iron condor capitalizes on the time decay of options premiums and a neutral or mildly volatile market. In such situations, the stock remains within a defined range, known as the “wings” of the condor.  

Understanding an Iron Condor

The iron condor strategy can be executed in two fashions:

Long Iron Condor

It generates a net debit and involves the following trades:

• Purchase one out-of-the-money (OTM) put option with a strike price below the stock’s current trading price (Short). This OTM put will safeguard your capital against a considerable downside price movement of the stock.
• Sell one OTM put option with a strike price further below the stock’s current trading price (Long).
• Sell one OTM call option with a strike price above the stock’s current trading price (Short).
• Purchase one OTM call option with a strike price further above the stock’s current trading price (Long). This OTM call will safeguard your capital against a considerable upward price movement of the stock.

Here, a call option is OTM when its strike price exceeds the stock’s market price. Conversely, a put option is OTM when its strike price is lower than the stock’s market price.

Short Iron Condor

It generates a net credit and involves the following trades:

• Sell one in-the-money (ITM) put option with a strike price above the stock’s current trading price (Short).
• Buy one ITM put option with a strike price even further above the stock’s current trading price (Long).
• Sell one ITM call option with a strike price below the stock’s current trading price (Short).
• Purchase one ITM call option with a strike price further below the stock’s current trading price (Long).

Here, a call option is ITM when its strike price is lower than the stock’s market price. Conversely, a put option is ITM when its strike price is greater than the stock’s market price.

Furthermore, The short call and put options  are called the “body,” while the other long ones are called the “wings.”

Iron Condor Profits and Losses

For a long iron condor, the maximum profit is the strike prices of the two puts or the two calls minus the net premium paid and commissions. The maximum loss is restricted to the net premium paid in implementing iron condor strategy.

For a short iron condor, the maximum gain is the net premium received in implementing this strategy. The maximum loss is the difference between the strike prices of the two calls or the two puts and the net credit received and commissions.

In both cases, you lose if the stock’s price moves substantially beyond the defined range before expiration.

Example of an Iron Condor Option Strategy

Now, let’s understand how an iron condor strategy works with an example.

What Is an Iron Condor Example?

Suppose the shares of a company’s stock are trading at ₹100 apiece. You have a neutral perspective on the stock and, therefore, decide to implement an iron condor strategy.

• You purchase one put option with a February expiry and a strike price of ₹90 at a premium of ₹50.
• You sell one put option with a February expiry and a strike price of ₹80 at a premium of ₹15.
• You purchase one call option with a February expiry and a strike price of ₹110 at a premium of ₹4
• You sell one call option with a February expiry and a strike price of ₹120 at a premium of ₹8.

So, the net premium you receive will be:

Net Premium Received = [(Sell Put Premium – Buy Put Premium) + (Sell Call Premium – Buy Call Premium)]

Net Premium Received = [(10-5) + (8-4)]

Net Premium Received = [5+4] = ₹9

If each options has a lot size of 1000 shares, your initial profit will be ₹9×1000 = ₹9000.

Case 1: The stock price at the contract’s expiration lies between ₹95-105.

Let’s assume the price of the stock is ₹103 at the end of the expiry. Then,

• The short put option (buy) will expire worthless as you can sell at ₹90 instead of ₹103.
• The short call option (buy) will expire worthless as you can buy at ₹110 instead of ₹103.
• The long put option (sell) will expire worthless as you can sell at ₹80 instead of ₹103.
• The call option (sell) will expire worthless as you can buy at ₹120 instead of ₹103.

Net profit: ₹9000 (the initial difference of the premium)

Case 2: The stock price at the contract’s expiration is below ₹95 or higher than ₹105.

In this scenario, your loss will be the difference between the strike prices of the two calls/puts, i.e., (120-110) or (90-80) = ₹10. As the lot size is 1000, you will incur a total loss of ₹10,000.

However, since the initial profit you made was ₹9000, your loss will be limited to ₹10,000-₹9000 = ₹1000.

Are Iron Condors Profitable?

The iron condor strategy is profitable in relatively stagnant market conditions when the stock price remains within the selected range of strike prices.

Time Decay

Time decay, or theta, works in favor of iron condors. Every day, the time value of options decreases, contributing to potential profits. Traders benefit the most when the stock’s price remains within the expected range as expiration approaches.

Implied Volatility

Higher implied volatility (IV) leads to higher options premiums, which benefits iron condor traders as they can sell options at higher prices. However, excessively high volatility also increases the risk of large price swings.

Strike Prices

Picking the right strike prices is critical. Wider spreads may provide more premium but also increase the risk. Narrower spreads reduce risk but may result in lower premiums.

Brokerage and Commissions

Transaction costs like commissions and fees eat into profits, so traders should consider their impact on their overall returns.

Successful iron condor trades rely on accurately selecting strike prices, timing, and proper risk management (stop-loss orders and position sizing).

Closing Thoughts

The iron condor strategy, with its defined risk and solid profit potential, offers a valuable tool for options traders seeking income generation or downside protection. With its characteristic “wingspan” of limited risk and a high probability of profit, the iron condor enables options traders to capitalize on market stability and time decay.

While its simplicity and neutrality are alluring, it is not a risk-free magic bullet. Careful consideration of market conditions, risk management methods, strike selection, and execution costs is critical. If implemented with a well-informed mindset, the iron condor strategy can become a cornerstone of your options trading toolkit.

So, trade responsibly, understand the inherent risks, and harness iron condor’s potential to navigate market uncertainty with a calculated approach.

FAQs:

The stock market roars, roars again, then falls silent. In this unpredictable dance, traders usually chase the bulls or bears, seeking profits amidst the stampede.

But what if a particular stock does not seem to be going anywhere at all? All traders will eventually slip into market doldrums. This stagnation period lasts for weeks, or worse, for months.

If you go long or short during this time, you will not make much or lose considerable (hard-earned) money. On the flip side, if you remain market-neutral, your profitability will likely outvalue those directional schooners at a robust pace.

How is that possible? Enter neutral options strategies. Traders use these approaches when they predict minimal stock price movements or are uncertain about the overall market’s direction.

Let’s explore the best neutral options strategies that will keep you ahead of the curve no matter the market’s mood.

What is a Neutral Trend?

A neutral trend is a situation where the stock price or the market’s overall movement is neither predominantly upward (bullish) nor downward (bearish). Simply put, the market or price movement remains stable or sideways, indicating a balance between buying and selling pressures. Moreover, the situation results in a lack of a clear and sustained direction in stock markets.

A neutral trend in the bourses happens due to multiple reasons, including:

The market wants to find equilibrium and solidify profits or losses before the next directional move

Lack of significant macroeconomic news or data releases

Neutral sentiment among options traders, where neither optimism nor pessimism prevails

Options traders often use technical analysis indicators or chart patterns to identify periods of neutral market trends. Some common indicators they use for this purpose include moving averages, Bollinger Bands, and oscillators like the Relative Strength Index (RSI).

Advantages of Neutral Options Strategies

Here are some key benefits of neutral options strategies:

Time Decay (Theta)

Many options strategies leverage time decay, also called theta decay. As time passes, the value of options decreases, particularly for out-of-the-money (OTM) options. Traders employing neutral options strategies can benefit from this decay, especially if the market remains relatively flat.

Income Generation

Neutral options strategies involve selling options to generate income. When market volatility is low, options premiums may be less expensive, and traders can capitalize on this by selling options contracts.

Profit in Sideways Markets

Neutral options strategies can be profitable when markets are moving sideways or within a defined range, unlike directional strategies that rely on the stock moving significantly in one direction. This makes them particularly attractive during choppy or consolidating market environments.

Versatility

Traders can find several neutral options strategies, including iron condors, butterflies, and calendar spreads, to suit different market conditions and risk tolerances.

Disadvantages of Neutral Options Strategies

Despite the benefits, neutral options strategies have the following drawbacks:

Limited Profit Potential

While selling options using neutral strategies provides a consistent cash flow, it also limits the profit potential. The maximum gain is usually capped at the premium received when initiating the trade.

Prone to Market Shocks

Unexpected market events, including geopolitical developments or economic surprises, trigger rapid and unpredictable price movements. Neutral options strategies do not perform well if stock markets experience a solid and sustained directional movement. In such cases, losses on one side of the position outweigh gains on the other, resulting in an overall loss.

Complexity

Some neutral options strategies, such as calendar spreads or iron condors, can be complex to implement as they involve multiple legs. Managing and adjusting these positions requires a good understanding of options mechanics and risk management.

List of Neutral Strategies

Covered Call

A covered call is a neutral options strategy where you own shares of a stock and simultaneously sell a call option on it.

If the stock price stays below the strike price by the expiration date, the call option expires worthless, and you keep both the stock and the premium. Conversely, if the stock price exceeds the strike price by the expiration date, the buyer can purchase your shares at the strike price.  Either way, your maximum profit is capped at the premium received plus any price appreciation below the strike price.

The covered call strategy is suitable for traders who are neutral to moderately bullish on the stock.

Covered Call Collar

A covered call collar, or simply called a collar, builds upon the simple covered call by adding an extra protection layer against considerable downward price movements. This neutral options strategy includes three primary components – owning the stock, selling a covered call, and buying a protective put.

Here is how it works:

• Own a specific number of shares of a stock
• Sell one out-of-the-money (OTM) call option on the same stock with a predefined strike price and expiration date
• Purchase one OTM put option on the same stock with the same expiration date but a lower strike price than the call option’s strike price
• Get the call option premium for selling the call option

Here, OTM means trading options at a higher price than the stock’s current market price (CMP).

Covered Put

A covered put is a neutral options strategy where an investor has a short position in the stock and sells put options against that short position. The put option sold is usually an OTM put. Traders use this tactic when they are neutral to moderately bearish on the stock’s price and want to generate income from the premium received by writing put options.

Short Straddle

To use a short straddle, you must simultaneously sell both call and put options with the same strike price and expiration date. Both the options you trade must be at-the-money (ATM), meaning the strike price is the same as the stock’s CMP.

This neutral options strategy is ideal when you believe price volatility will likely remain low, so you can collect option premiums without owning the stock. Your potential loss is unlimited if the stock price moves significantly in either direction.

Short Strangle

A short strangle involves simultaneously selling a call option and a put option (both OTM). This neutral options strategy is ideal when traders expect the stock to remain within a specific price range and want to profit from a decrease in the overall volatility of the stock.

Short Gut

The short gut incorporates selling equal quantities of in-the-money (ITM) calls and puts of the same stock at the same expiration date. In other words, you trade options at strike prices below the stock’s CMP. In this neutral options strategy, the strikes should be equidistant from the CMP of the underlying stock.

Calendar Call Spread

A calendar call spread helps traders to profit from time decay and a neutral to slightly bullish outlook on the stock’s price. First, you write a call option with a near-term expiration date at a specified strike price, generally a few weeks or months away. Simultaneously, you purchase another call option with the same strike price but a longer-term expiration date, usually several months.

Calendar Put Spread

A calendar put spread is a neutral to bearish options strategy. Under this tactic, traders purchase a put option with a longer-term expiration date and simultaneously sell another put option with a near-term expiration date. Both the trades happen at the same strike price, typically OTM.

Call Ratio Spread

A call ratio spread is a neutral to bullish options strategy where you purchase call options at lower strikes (ITM) and sell more call options at higher strikes (OTM). Both options trades occur on the same underlying stock with the same expiration date.

Put Ratio Spread

A put ratio spread is a three-legged neutral options strategy where you buy ITM and ATM put options and sell more OTM put options. Both transactions happen on the same stock with the same expiration date.

When you sell more OTM puts, it is called the put ratio front spread. Conversely, the put ratio back spread arises when you buy more OTM puts.

Calendar Straddle

A calendar straddle involves the simultaneous purchase of call and put options with the same strike price but different expiration dates. This neutral options strategy includes the following trades:

• Sell ATM calls with a near-term expiration date
• Sell ATM puts with the same expiration date
• Purchase ATM calls with a later expiration date
• Purchase ATM puts with the same expiration date

Calendar Strangle

A calendar strangle involves using two calendar spreads – short strangle and long strangle – with different strike prices but the same expiration date. This neutral options strategy is designed to leverage the time decay of options (theta decay) and profit from low volatility.

Here is how a calendar strangle is structured:

• Sell OTM call options with a near-term expiration date
• Simultaneously, purchase OTM call options with a later expiration date and the same strike price
• Sell OTM put options with the same near-term expiration date
• Simultaneously, purchase OTM put options with a later expiration date and the same strike price

Iron Butterfly Spread

An iron butterfly spread involves trading four options with the same expiration date but three different strike prices.

This neutral options strategy is further divided into:

Long Iron Butterfly

It includes the following transactions:

• Purchasing one OTM call/put option
• Selling two ATM call/put options
• Purchasing one OTM call/put option

Short Iron Butterfly

It includes the following transactions:

• Selling one OTM call/put option
• Buying two ATM call/put options
• Selling an OTM call/put option

You achieve the maximum profit if the stock price matches exactly the middle strike price at expiration. The maximum risk you bear is limited to the net premium paid or received when trading the options.

Iron Condor Spread

An iron condor spread contains two put options (long and short), two call options (long and short), and four strike prices, all with the same expiration date. This neutral options strategy also further breaks down into:

Long Iron Condor

It includes the following four legs:

• Purchase one far OTM put option
• Write one OTM put option
• Write one OTM call option
• Purchase one far OTM call option

Short Iron Condor

It includes the following four legs:

• Purchase one OTM put option
• Write one far OTM put option
• Purchase one OTM call option
• Write one far OTM call option

The pre-determined strike prices for buying and selling options should be equidistant from each other at the same expiration date.

Your profit hits its maximum if the stock’s price closes between the strike prices of the call and put options at expiration. Your maximum risk is limited to the difference in strike prices of either the put or call spreads minus the net options premium received.

Iron Albatross Spread

The iron albatross spread, also known as the wide iron condor spread, is an advanced yet powerful neutral options strategy that includes four separate trades:

• Buying far OTM call options
• Selling an OTM call option
• Purchasing far OTM put options
• Writing an OTM put option

Your maximum profit is the amount of options premium received, while your maximum loss is restricted to the difference between the strike prices of the options you traded.

Harvesting Profits, Sideways

In the ever-changing global market, where volatility can erupt unexpectedly, neutral options strategies offer a haven of calculated opportunity. They arm options traders with the tools to capitalize on uncertainty, hedge existing positions, and build a consistent income, even when the stock takes a breather.

While mastering these strategies requires dedication and thorough risk management, the potential rewards are undeniable. Plus, remember that neutrality can be your silent partner, whispering profit amidst the noise.

So, embrace stock market neutrality, include these powerful neutral options strategies in your trading arsenal, and let the market’s indecision become your greatest advantage. 

FAQ

The stock market falls and rises – not just in price but also in magnitude and volume. Some periods are highly volatile, with significant price movements. These market conditions excite some traders/investors while they drag others to nail-biting situations.

Sure, you must be thinking, “People make money when markets are bullish and lose money when they are bearish,” right?

Wrong.

There are multiple bearish options strategies for trading created for such bleak market sentiments. This article walks you through the seven carefully curated approaches that will help you navigate and thrive in declining markets.

Why Use Bearish Options Trading Strategies?

Here are compelling reasons to consider incorporating bearish options trading strategies into your investment toolkit:

Profit in Falling Markets

In a bearish market, traditional “buy and hold” strategies provide limited opportunities. Bearish options trading strategies, on the other hand, enable you to actively participate in market downtrends by taking short positions and capitalizing on downside movements.

Risk Mitigation

Bearish options trading strategies help you hedge against potential losses in your portfolios during negative market sentiments. You can use various, such as stop-loss orders and predefined exit points, to protect capital and manage risks effectively.

Portfolio Diversification

Incorporating bearish options strategies adds to your portfolio diversification. When combined with existing long positions, these strategies create a more balanced approach and reduce overall risk exposure, especially during market slumps.

List of the Best Bearish Option Strategies

1. The Bear Call Spread

The bear call spread involves trading two call options having different strike prices but the same expiration date. Also called credit spread, this mildly bearish option strategy has two parts.

The first part involves selling a call option with a strike price below the stock’s current market price (CMP). This call option is called “in the money” (ITM) since its strike price is less than the CMP.

The second part involves simultaneously buying another call option with the same expiry date but at a higher strike price. This call option is called “out of the money” (OTM) since its strike price exceeds the CMP.

Options traders use the bear call spread strategy when they believe that the stock’s price will drop moderately or the level of fluctuation is high. This bearish option strategy is less risky as the maximum return is limited to the difference between the premium received and paid while trading options.

The potential profit is the net credit you receive, while the maximum loss is limited to the spread minus net credit (including commissions).

2. The Bear Put Spread

The bear put spread involves purchasing a put option at a higher strike price (ITM) and simultaneously writing a put option at a lower strike price (OTM). Both the options trades happen at the same expiration date and on the same stock. Also called debit put spread, options traders use this bearish options strategy to mint profits from a stock price decline.

The primary advantage of the bear put spread is that your trade’s net risk is reduced to the net amount paid (including commissions) for the options. Moreover, you get maximum profit when the stock’s price closes below the lower strike price at expiration.

Furthermore, this mildly bearish options strategy works well in modestly declining markets. As such, the lower the stock price goes, the more profit you extract.

3. The Strip Strategy

You can use the strip strategy if you are heavily bearish on stock markets and bullish on volatility. In this bearish options strategy, traders buy two put options for each call option, all on the same underlying stock, strike price, and expiration date. All the options are called “at the money” (ATM), as the strike price is identical to the CMP.

While the strip is considered a neutral to bearish option strategy, your profit surges as the stock’s price falls substantially instead of rises. Moreover, you experience maximum loss when the stock’s price inches closer to the strike price of all the three options traded.

As such, the strip strategy offers almost unlimited profit and limited loss.

4. The Synthetic Put

The synthetic put is ideal for traders with a bearish outlook on a stock’s price and who want to mimic the risk-reward profile of owning a put option. This bearish options strategy involves two separate trades. First, traders take a short position in the stock. Then, they buy a call option – at the money – on the same stock.

This combination acts like a long-put option, so you should implement this approach to safeguard your position against an unexpected rise in the stock price.

For maximum gain from a synthetic put, subtract the option premium and the lowest possible stock price (i.e., zero) from the short sale price. On the flip side, the maximum loss is limited to the stock’s selling price (where it was sold short), less the strike price, and less the call premium paid.

5. The Bear Butterfly Spread

The bear butterfly spread contains two critical steps. First, you buy two long calls at a strike price equal to the predicted stock price (ATM). Then, you buy one short call in the upper (OTM) and lower strike prices (ITM) each. Conversely, you purchase two long puts, one at a lower strike price and another at a higher strike price. Then, you sell one put option in the middle strike.

The expiration date for all these trades must be the same. Moreover, the middle strike (body) should be equidistant from the upper and lower strikes (wings). The maximum profit from this bearish options strategy is the net credit minus commissions, while the maximum loss is restricted to the net options premium paid.

6. The Bear Put Ladder Spread

The bear put ladder spread is similar to the traditional bear put spread but with an extra twist: you have to write an additional put with a lower strike price. This neutral-to-bearish option strategy involves three crucial transactions:

• Purchasing a put option at a strike price the same as the stock’s CMP (ATM).
• Selling a put option at a strike price below the current stock price.
• Selling another put with a strike price lower than the previous trade.

Traders use the bear put ladder spread when they anticipate the stock’s price will not decline considerably. However, the losses are high if the price drops more than desired. Profits are limited, with the maximum you can lock when the stock’s price lands between the strike prices of the put options written.

7. Bear Iron Condor Spread

The bear iron condor spread is a four-part options trading tactic that combines a bear call spread and a bull put spread. Here, the strike price of the short call is greater than that of the short put, with both trades having the same expiration date.

The most you gain is the net credit minus commissions. The most you lose is the difference between the strike prices of the bull put spread or bear call spread and the net credit received.

How to Manage Risks?

Effectively managing risks during market downturns using bearish options strategies requires careful planning, disciplined execution, and ongoing monitoring. Here are key considerations to improve risk management:

Diversification

Spread risk across multiple bearish options trading strategies to minimize exposure to any single position. This includes bear put spreads, synthetic puts, and other techniques that benefit from downward price movements.

Position Sizing

Determine the appropriate size for each position based on your portfolio size and risk appetite. Avoid overconcentration in a single strategy or asset.

Use Stop-loss Orders

Implement stop-loss orders to exit positions if they hit a pre-determined price automatically. This helps you limit potential losses and stay ahead of volatile market movements.

Risk-Reward Ratio

Evaluate the risk-reward (R/R) ratio for each trade. Ensure that potential profits justify the associated risks in bearish market movements. The ratio helps make informed decisions on position sizing and strategy selection.

Volatility

Bearish markets often come with increased volatility. Generally, you want to purchase options when you expect volatility to rise and sell them when you believe volatility will decline. Factor this into your risk management, and consider bearish options strategies that can benefit from volatility, such as synthetic puts or the strip strategy.

Profit in a Slide

Weathering market downturns demands due diligence, and adding these seven bearish options strategies to your toolkit can be invaluable. From the versatility of bear put spreads to the precision of long puts and the strategic use of bear call spreads, each method serves as a means of hedging against bearish market conditions.

Conclusion

Successful trading requires astute analysis, disciplined execution, and a diversified approach. Strengthening your grip on these bearish options strategies not only helps you safeguard your portfolios but also capitalize on profit opportunities amid market declines.

That said, conduct thorough research and consider your risk appetite before investing your money, as options trading is a bit more risky than buying/selling stocks and traditional swing trading.

FAQ

Are you new to the stock market? If so, you must have heard of one of the most popular investment tools – stock options trading. This financial instrument has gained significant traction as it enables investors and traders to diversify their portfolios.

While stock options trading yields considerable profits, investors can end up enduring huge losses if not understood properly. A SEBI report found that 9 of 10 individual traders incurred net losses during FY19-FY22. The average stood at ₹1.1 lakhs during FY22.

This article will discuss the fundamentals of buying options in stock markets and delve into investing jargon around it.

What is Stock Options Trading?

Stock options trading involves buying and selling options contracts. These contracts are associated with an underlying asset, and allow investors to trade a certain volume of that asset at a particular price during a particular date.

The pre-negotiated price is called the strike/exercise price, and the amount you pay upfront for any stock option is called the premium. Additionally, the predetermined deadline on or before which you can trade these assets is called the expiration/maturity date.

The best part about stock options trading is that you do not have to buy or sell assets compulsorily. Instead, it offers you the “right” to trade stock option contracts.

How Does Stock Options Trading Work?

As you dip your toes into options in stock markets, you will find two primary types of stock options: Call options and Put options.

Call Options

A call option lets you purchase stock option contracts at the strike price until the expiration date. Its value increases as the underlying stock price increases. Hence, call options are useful when the markets are bullish. Alternatively, you can sell a call options contract if you reckon the stock price will decline or does not show much movement.

Let’s say ABC’s stock is currently trading at ₹100/share, but you believe it will soar to ₹130/share in the following three months. So, you buy 100 call option contracts for ABC with a strike price of ₹110/share and a maturity date three months from now. To exercise the contract, you only pay a premium of ₹10/share to the person selling them.

If ABC’s stock price surpasses ₹130 within the next three months as expected, you can buy the stock at the lower ₹110 strike price, even though the market price is ₹130. You can then sell the stock immediately at that market price and earn a profit of ₹130-₹110-₹10 = ₹10/share.

Now if ABC’s stock price stays below ₹110, you do not have to use the call option; instead, you only lose the option premium you initially paid, i.e., ₹1000.

Put Options

A put option lets you sell stock option contracts at the strike price until the expiration date. Its value increases as the underlying stock price decreases. Hence, call options are useful when the markets are bearish. Alternatively, you can buy a put options contract if you believe the stock price will increase or does not show much movement.

Let’s say ABC’s stock is trading at ₹100. You think it is overvalued and will drop to ₹75 in the next three months. So, you buy a put option contract with a ₹90/share strike price and a three-month expiration. To exercise the contract, you only pay an option premium of ₹10/share.

If ABC’s stock price drops below ₹75 as you wished, you can sell the stock at the higher ₹90/share strike price, even though the current market price is lower. You can then sell the stock at the higher ₹90 strike price and earn a profit of ₹90-₹75-₹5 = ₹10/share.

If ABC’s stock price remains above ₹75, you do not have to use the put option; instead, you only lose the option premium.

Benefits of Buying Options in Stock Markets

While stock options trading is slightly more complex than stock trading, you can lock in relatively bigger profits if the asset price goes up. That is because you do not have to pay the entire price for the stock in an options contract.

Similarly, stock options trading can reduce your losses if the stock price tilts in the opposite direction than expected for either a put or call. In such cases, you should let the options contract expire. That way, your losses are equal to the premium plus the associated trading fees.

Things to Know Before Buying Options in Stock Market

Before picking stocks for options trading, there are multiple factors to consider:

Multiple Expiration Dates

India runs one of the world’s most complex and extensive options markets. In the spot market alone, there are 188 different trading options available, including complex contracts like iron condors, short saddles, and calendar spread. Hence, finding an options contract that suits your needs is relatively seamless.

Intrinsic Value

Intrinsic value is a stock’s worth that is irrelevant to its current market price. Future earnings from the put option, estimated using an options payoff chart, determine an option’s intrinsic value.

Time Value

Time value is the rate of increase of an option’s price as time passes. A call option has more time value than a put option. That is because buyers of a call have more time before they purchase something at the strike price. As such, they have more time to realize their profits from exercising their option before any expiration date rolls around again.

Volatility

Stock options trading is more volatile than traditional stock trading. Indeed, experts reckon that profit potential is maximum in high-volatile stocks.

Stock options trading is ideal for traders who look to stand out by profiting from unpredictable events, such as economic swings or global trends that could trigger price fluctuations until their expiry.

Risk Tolerance

Generally, investors with deep pockets and a high-risk appetite buy/sell stock options. Moreover, this investment strategy involves short-to-medium-term gains. The reduced time window increases the uncertainty pertaining to stock options trading.

Every option strategy has a clear-cut risk/reward profile, so understand it properly. Avoid overcommitting and manage risk through diversification and position sizing.

Trade Stock Options With Confidence

While stock options trading seems quite straightforward and offers greater profit margins, you can slip into trouble if you are a rookie investor. As with any other investment options, better understand what type of stock option you are purchasing. You could lose your hard-earned money if your thesis turns sour.

If possible, use online simulators to get a gist of how stock options trading works before trying the real deal. Whenever you are ready, start small – you can always try more aggressive stock options strategies down the lane. Initially, better focus on some stocks you know well and wager an amount you are comfortable losing.

FAQs

Overview

You know, options trading is extremely lucrative and a bit like a rollercoaster ride in the stock market! Some say it’s a real ‘Hera-Pheri‘ because you can win big, but you can also lose big. It’s like taking shortcuts in life – exciting but very risky! 

In options, folks bet on whether prices will go up or down. Sometimes, you’ll feel like you hit the jackpot, just like ‘Dene Wala Jab Bhi Deta, Deta Chappar Phaar Ke.’ But if you’re not armed with technical knowledge, mostly, you’ll find yourself under a pile of debts like ‘Baburav’ with ‘Udhar Walas’ at your door. And if you’re here to gamble based on news and tips, get ready for more ‘Mere Ko To Aisa Dhak Dhak Ho Rela Hai‘ moments! 

The stock market is highly dynamic, so is our theory of demand and supply. But first, let’s dive into the action and start with the basics of options trading, made super simple for you.

What Are Options?

Imagine options trading like a special contract. This contract gives you a unique right to buy or sell a certain number of securities or other assets, at a fixed price in future. With these special rights, you also get the choice to use these special rights if you want to but not obliged (forced) to do so. But you can do this either before a specific date or on that date itself. 

In technical terms, options are part of a larger family of financial tools known as “Derivatives.” Think of them as the cool cousins of the finance world. The price of a derivative set on the base of price of some other asset, such as forward and futures, puts, calls, swaps, and mortgage-backed securities. These cousins are all about adding excitement and creativity to your investments, making your financial journey a lot more interesting and rewarding.

Interesting Fact: Options trading wasn’t initially exercised into The Wall Street. It was agricultural trader and indigenous farmer, William Garratt who practiced options trading in 1848 after analyzing the market risk. 

Now, you might be thinking, “Why should anyone be interested in options?”. Well! As said in the beginning, options can add an exciting depth to your financial journey – huge depth if done right.

Picture this: You’re looking for ways to hike your incomes and options can be your side hustle. It can help you with extra funds and make your life a little more colorful and convenient. 

Options can also be your financial safety net. They work a bit like an insurance policy for your investments, helping you avoid significant losses. It can also be your financial superpower and provide a way to increase your investments, making them more powerful. It’s a bit like getting more bang for your buck in the world of finance.

Key Takeaways:

• Options are like special tools for making financial bets.
  
• Call options are like “I want to buy” bets, while put options are like “I want to sell” bets.
  
• Call options allow you to buy something at a set price before a specific date.
  
• Put options let you sell something at a set price before a particular date.
  
• People use options for various reasons, from making predictions to protecting their investments.

Disclaimer: Options involves significant market risks and may not be suitable for everyone. It includes forecasting and a significant risk of financial loss.

What is Strike Price

The strike price, also known as the exercise price, is like a pre-decided tag or “agreed-upon” price on an option. It’s the price set in advance for buying or selling the underlying asset. This price is fixed when you create the options contract and plays a big role in deciding how profitable your options trade can be. It’s a bit like the price tag on an item in a store, telling you what it’s worth in the market.

How Options Trading Work?

Options trading works like the agreement that allows you to pick whether you want to buy or sell an underlying asset, such as stocks, at a certain price (strike price) on a specific date work (the expiration date). Imagine this – you make a reservation at a restaurant: you select what to order, at what price, and when you want to enjoy your meal. Options can be a way to manage risks. 

Let’s take an example for better understanding. Options are a bit like making a deal, Indian style. Imagine you’re at a street market, and you spot a beautiful silk scarf. You can reserve it for a fixed price, say ₹500, and you have the choice to buy it within a week. Now, let’s break it down:

• Reservation: You’ve essentially made a reservation for that scarf. You don’t have to buy it if you change your mind.
  
• Fixed Price: ₹500 is your “strike price.” It’s the price you’ll pay, no matter what the market price of the scarf is when you decide to buy.
  
• Time Frame: You’ve got a week to decide – it’s like a limited-time offer.

Now, how can this be handy? Let’s say the market price for that silk scarf suddenly shoots up to ₹800 during the week. You can still buy it for ₹500 – that’s your right! But if the market price stays the same or drops, you’re not obliged to buy it; you just let your reservation expire.

You can make a deal to buy or sell an asset at a set price within a certain timeframe. It’s a tool to manage risk, speculate on price changes, or even create income, just like haggling at a bustling Indian bazaar!

Types of Options: Call and Put

Like the spices in an Indian kitchen, options also come in different flavors, each with its unique purpose and taste. There are two types of options trading you can go with– call and put. Let’s uncover the sheets and dig deeper into these concepts to make the concept clearer: 

Call Options

Picture this: You bought a train ticket to reserve a seat in the train at a predetermined price and time. Now, no matter if the fare of the train ticket goes up or down, you have the seat booked for you. You are free to choose whether you want to use the services or not. That’s a call option. Even if the price of the asset goes up, you can still purchase the security at the agreed-upon rate within a specific timeframe. 

Quick Fact: Only about 10% of contracts actually get used when they expire. And here’s the twist – it doesn’t mean rest were useless while they were in play as trader could use it whenever they want before the expiry date.

Call options gives you the right to “call” or buy an asset at a set price within a specific time period. There are two types of call options popular in the stock market:

• American-Style Options: These are like versatile options that let you buy the asset anytime until the expiration date. It’s a bit like having the flexibility to buy your favorite snacks whenever you want.

• European-Style Options: These options are a bit more specific. They only allow you to buy the asset on the actual expiration date, like celebrating a birthday on the exact day. You can’t do it earlier or later.

These two options styles offer different ways to plan your investments, like choosing between two different kinds of adventures, each with its own rules and rewards.

Call Options Example

Let’s take a simple example in the Indian stock market. Imagine you are interested in, “ABC Ltd.,” and you think its stock price will shoot up in soon. Now let’s explore how a call options work:

• Selecting a Company: You pick “ABC Ltd.” as the company you’re looking at.
  
• Strike Price: Currently, “ABC Ltd.” stock is priced at ₹1,000 per share. You chose to get a ‘call option’ with the same strike price and want to buy the stock. 
  
• Premium Payment: Now you pay the premium token price of this stock of, let’s say, ₹50.
  
• Expiration Date: And you select an expiration date, maybe one month from today.

Here is how it plays out:

If the stock price of “ABC Ltd.” go up than ₹1,100 per share by the expiry date, you can choose to use your call options, buy the stock at the lower strike price or potentially sell it at the higher market price, making your personal margin. 

However, if the stock price remains below ₹1,100, or doesn’t flick much, you can choose to not use your option and let it expire. This will only cost you premium token amount you’ve paid, i.e., ₹50. 

So, now you see, call options offer you a smart way to profit from rising stock prices without paying the complete price for a stock. It’s like reserving the right to buy something at a lower price, but with the flexibility to change your mind if things don’t go as planned.

Put Options

On the flip side, a put options is akin to reserving the right to sell your product or asset at a fixed price within a set period of time. Imagine this as securing the option to sell your old scooter for a fixed price. If the value of your old scooter drops, you will still be able to sell it at higher price. 

Quick Fact: Mary and William in London started using puts and “calls” back in the 1690s as trading tools.  It’s like they had a taste of trading options centuries ago!

Put options act like the shield of your investment from unexpected market falls or storms. You might not always require the shield, but when you do, it will be here to help you with the upcoming trouble. Both call and put options offer different strategies to lead your finance journey in the market, like selecting between sweet and savory snacks at a chai stall – all depends on the mood, weather, and situation. But first, let’s understand the concept better with an example. 

Put Options Example

Let’s start with a simple example. Imagine you already own 100 shares of “XYZ Company,” each worth ₹1,200, and you feel like market is going to take a dip. Now, let’s calculate how this is helpful for you:

• Stock Ownership: You’ve got 100 shares of “XYZ Company” in your portfolio, each share of ₹1,200.
  
• Enter the Put Option: Now you decide to buy a put options with a strike price of ₹1,100, and it lasts for one month. The cost? Just ₹50.
  
• Market Dips: Unfortunately, the market takes a down spin, and the share price drops to ₹1,000 each.

In this case, let’s see how the put options comes to your rescue:

You get the rights to sell your 100 shares at the agreed-upon price (₹1,100), even though the market rate is just ₹1,000, thanks to put option. This means your probable loss per share is limited at ₹100. It offered you a shield against the market’s mood swings.

In simple terms, the put options acts like financial insurance, safeguarding your investments when the market doesn’t play nice. It’s your backup plan for those unpredictable moments in the stock market.

Difference Between Call v/s Put

What is Option Buying and Option Selling?

In brief, options are the derivatives that offer you right to buy or sell a security at a selected price at fixed data in the future. It’s a bit like game between two key players – options buyers and options writer, also known as the options seller.

Options Buyer (Player 1)

Imagine the options buyer as someone with choices to make, a bit like deciding which movie to watch. You can select a security and choose to make a purchase in specific time and rate in the future. An options buyer has the choice to select the game they want to play at the game zone. 

The important thing is to remember that an options buyer doesn’t have any obligation to do anything if they don’t want to. It’s like buying a movie ticket to book the seat at movie hall, however, you have choices either to go or to not go for the movies. Although, you have spent the money on it. 

Fact Check: Did you know that a majority of options bought by individuals are never exercised? That’s right, around 70-80% of options bought simply expire without being used. It’s a reminder that having choices in the financial game doesn’t always mean you have to act on them.

Options Writer (Options Seller – Player 2)

On the contrary, options writer, also known as options seller are the ones who offer a service or delivery stocks. Just like a service provider, a bit like your favorite pizza place delivering your order. Now imagine, this service provider has given you a ticket (commitment) to a movie, and when you appear to movie hall, they are ready to do what they have agreed to. Options writer (seller) are obligated to deliver you the service they have committed to as per the terms of options agreement. 

When it comes to options trading, both options buyer and options seller (options writer) acts differently in different types of options. Let learn more about it in more details:

What is Call Options Buyer and Call Options Writer (Call Options Seller)?

Call Options Buyer

Call buyers are like optimistic folks, bullish in nature. They expect prices to go up, and they’re excited about it. 

• Call buyer is someone who buys a call options, expecting the price of asset will go up.
  
• By buying a call options, they get the right to purchase the asset at a set price.
  
• They pay a premium for this right and can choose to use the option or let it expire.

The best part? If prices go way up, buyers can make a lot of (unlimited) money. But their worst-case scenario is just losing the premium they paid (limited loss). So, they have potential for big wins with limited risk.

Call Options Seller (Options Writer)

Call sellers are a bit more cautious. They’re not so sure prices will go up. They act not bullish (sideways, bearish). 

• Call seller is usually someone who owns the asset.
  
• By selling a call options, they agree to sell the asset if the buyer exercises the options trading.
  
• They receive a premium to get the right to sell and are obligated to sell.
  
• They profit if the option isn’t used. The profit is limited but the loss is unlimited. 

The catch? If prices skyrocket, the call seller’s losses can keep piling up. But their profit is limited to the premium they received. So, they’re not in it for big gains; they prefer staying safe.

Note: When a call options buyer enters the picture, they get the choice whether to purchase the stock or not (not obliged), but will still pay the premium regardless the order execution. On the flip side, option seller obliged to sell the stock at the fixed price upon the request of buyer. 

What is Put Options Buyer and Put Options Writer (Put Options Seller)?

What is Put Options Buyer?

Put buyers are like realists. They think prices will fall, and they’re prepared for it. Put buyer acts bearish. 

• Put buyer purchases a put options and expect the asset price to go down.
  
• By buying put options, they get the right to sell the asset at a set price.
  
• They pay a premium for the right to sell and are not obliged for it.

Here’s the cool part: If prices really drop, they can make a nice profit. But if things don’t go as expected, their loss is limited to the premium. So, they’re ready for the worst while hoping for the best.

What is Put Options Seller (Option Writer)?

Put sellers are open-minded. They don’t mind which way prices go – up, down, or sideways. Put options seller acts not bearish (bullish, sideways).

• Put seller is usually someone who doesn’t own the asset and ready to sell put options.
  
• By selling them, they agree to buy the asset if the buyer exercises the options trading.
  
• They receive a premium for taking on this obligation.
  
• They profit is limited yet loss is unlimited.

In simple terms, call buyers bet on prices going up, call sellers are ready to sell if prices rise, put buyers bet on prices going down, and put sellers are ready to buy if prices fall.

Uses of Call and Put Options

You know, call options and put options have their uses in different situations. Take a look at the table below to see when and why people use them.

Call Options

• Buying Call option buyers use them to protect themselves if they think the price of something might go down. It’s like an insurance policy for your investments.
  
• American importers use call options on the U.S. dollar to safeguard their buying power in case the dollar loses value.
  
• People who own stocks in foreign companies use call options on the U.S. dollar to protect their dividend payments.
  
• Short sellers (those betting on stock prices going down) use call options to hedge their bets.

Put Options

• Buying Put option buyers use them as a safety net if they believe the price of something could go up. It’s like locking in a good deal in advance.
  
• American exporters use put options on the U.S. dollar to secure their selling costs in case the dollar’s value rises.
  
• Manufacturers in foreign countries use put options on the U.S. dollar to safeguard against a drop in their own currency when they get paid.
  
• Short sellers don’t benefit much from put options because a stock’s price can’t go below zero.

In simple terms, call options are like insurance against falling prices, while put options are safeguards against rising prices. People in various financial situations use them to protect their interests.

How to Trade Options

Trading options is like making deals in the stock market playground. To start the trading, you’ll need a demat account with a broker who offers a platform for options trading. Once you’re done with the initial set-up, you can start your finance journey. 

Here is how trading options work:

Choose Your Game: Options come in two flavors – calls and puts. If you feel like “I think the price of this thing is going up,” you can pick call. But if your study says that, “I think the price is going down” you can pick put. What you need to do is pick your strategy.

Pick Your Player: Later, you need to pick an asset or stock you want to play with like picking the team members for your game.

Set Your Rules: The most important part of options trading is to decide when you want to make your move. Like a game clock, every option has an expiry date and a set strike price. It’s up to you whether you want to go for a short time or a long play. 

Place The Bet – Entry: Place the bet on either buy or sell options. Buy call option if you feel that price will go up and buy put option if you feel like price will go down. Just like in a game of cards, you’ll have to decide if you’re holding onto a winning hand or folding.

Game On – Add Exit and Stop-Loss: Well, now that you have made your moves, game on! Keep a close look on the market, add your exit points and stop-loss to minimize the market risks.

Remember, like every other game, options trading also involves risks. Best players practice hard and believe in learning from experience. So, this is important to understand the strategies and rules of the game before you start playing. This will help minimize the chances of loose.  

Why Trade Options

Trading options is an appealing choice for investors as it brings a huge profit on the table. Imagine this, a person offers you 10 candies in 5 years for 50 RS. On the other side, you can make those 10 candies in 5 months. But here is the catch – the risk is considerably too high, and you might end up with nothing at all. Tough choice, right! 

Options provide flexibility to profit from various market conditions, including bullish, bearish, or range-bound markets. It also offers leverage to multiply gains with a smaller upfront investment. Additionally, it can help generate income through strategies like covered calls. But, it’s crucial to note that options trading involves risks and complexities, needing a solid understanding of the market and strategies. 

Note: It is important to educate themselves, develop a clear plan, and consider professional advice, before trading options. There is no guarantee of benefit or loss in the market. 

Risks and Potential Benefits (Advantages and Disadvantages) of Options Trading

Stock market comes with risk and surely options trading is not friends with you, unless you know everything about it. It’s like a cat who will only purr if you know it thoroughly, including its likes and dislikes. Here we have mentioned few potential benefits and risks (cons) of options trading. 

Advantages (Potential Benefits):

• Leverage: Options allow you to control a larger position with a relatively small amount of money. This can amplify your potential profits.
  
• Risk Management: Options can act as insurance for your investments. They provide strategies to limit losses and protect your portfolio.
  
• Income Generation: You can generate income by selling options. This can be especially appealing in flat or stable markets.
  
• Versatility: Options offer various strategies, allowing you to profit from different market conditions, whether it’s bullish, bearish, or neutral.

Disadvantages (Risks):

• Limited Time: Options have expiration dates. If the market doesn’t move in your favor within the given time, your option can expire worthless.
  
• Complexity: Options can be complex, and understanding the strategies and risks requires education and practice.
  
• Potential Losses: While leverage can amplify gains, it can also magnify losses. You could lose more than your initial investment.
  
• Market Volatility: Options are sensitive to market volatility. Rapid price swings can lead to unexpected outcomes.
  
• Fees and Commissions: Options trading often involves fees and commissions, which can eat into your profits.

If you want to take a brief look at all the potential benefits and risks, here we have simplified this for you:

In essence, options trading offers opportunities for both gains and losses. It’s crucial to educate yourself, have a clear strategy, and manage risks effectively when venturing into this market.

American vs. European Options

In the stock market, you can explore both European and American options. Both of them share many similarities, but the differences between them are also very important. Here let’s learn about them in brief:

American Options:

These are like all-access passes. With American options, you can buy or sell your underlying assets any time you want, right up until the expiration date. It’s like having the freedom to make your move whenever it makes sense for you. This is the reason why American options carries higher value in the market comparatively. 

European Options:

Think of these as more exclusive. European options only allow you to exercise your right on the expiration date itself. So, you don’t have the flexibility to make any exchange of asset before that day. It’s a bit like having a ticket to a show that only works on the show date; you can’t use it earlier.

There are more exotic options out there like knock-out, knock-in, barrier options, lookback options, Asian options, and Bermuda options. Exotic options are special because they’re not like regular options with unique ways of paying out, different expiration dates, and strike prices. However, you have to keep in mind that these are mainly used by professional derivatives traders.

In a nutshell, American options give you more control because you can choose when to act, while European options have a fixed exercise date. It’s like comparing an all-day buffet (American) to a reservation-only restaurant (European).

Options Trading Strategies You Must Know

Amature traders jump into the options trading without having the proper knowledge of operation strategies. These are not just strategies; these are ways to limit your risk and maximize your return on benefit. Here are few strategies listed just for you.

Married Put Strategy

When you buy a stock and get insurance (a put option) for it. In case if the stock price falls, your put options lets you sell the stock at a fixed price to limit your losses.

Protective Collar Strategy

You own a stock and buy insurance (a put option) while also renting out a part of your stock (selling a call option). It’s like protecting your house with insurance while letting someone rent a room in it.

Long Strangle Strategy

You buy both – a bet for rise in the price (call option) of higher strike price and a bet for fall in the price (put option) of lower strike price at the same time. You’re hoping for a big move in the stock price, no matter which way it goes.

Vertical Spreads

You make two bets on a stock with different price levels. It’s like saying, “I think the stock will move, but not too much.”

Long Straddles

You place the bet for price rise and a bet for price drop at the same time. You’re saying, “I’m not sure which way it’ll go, but when it does, I want to be there to profit.” It is different from long strangle strategy because long strangle involves different strike prices, whereas long straddles include the same strike price. 

There are few other strategies that are famous among traders, including Iron Condor, Long Call Butterfly, Bear Put Spread, Bull Call Spread, etc. Remember, each strategy has its own risks and rewards, so make sure you understand them before using them in your trading.

Is Trading Options Better Than Stocks?

Think of trading options and trading stocks like using different tools from a toolbox. The difference is owning a stock is like owning a piece of a company. You can wait for them to grow over time, but there’s a risk if the value of company goes down. Now, on the other side, options are more like agreement that let you control stocks without keeping too much money upfront at stake. They can be a bit tricky to follow and come with high risks. But options offer you ways to make money whether their price remain straight, or go up and down. 

In brief, it’s all about your knowledge of work, what you want to do, and how comfortable you are with taking a bit of risk. Just like picking the right tool for the job – sometimes you grab a hammer (stocks), and sometimes you need a wrench (options).

How Can I Start Trading Options?

Getting started with options trading is easier than you might think. Many online brokers now offer options trading such as Dhan, Zerodha, etc. and the process is fairly straightforward. First, you’ll typically need to apply for options trading and await approval from your chosen broker. Next, open a margin account as often it is a requirement by service providers.

Once you’re approved, you can start placing orders to trade options, much like you would for stocks. Access the option chain just like a menu of accessible options contract. Select the expiration data, the underlying asset (e.g., Apple) and the strike price. You need to make a decision whether you want to select a call options or a put option. 

Remember, options trading can be both exciting and complex, hence it’s important to start with a clear risk management strategy and right mindset while staying informed about market developments.

What Are the Charges for Options Trading? 

In India, when you trade options, there are some charges you should be aware of. Similar to the theme park analogy, you’ll discover various fees. 

• First, there’s a brokerage fee, which is like your entry ticket to the park. 
  
• Then, for each option contract you trade, there’s a per-contract fee, like paying for individual rides. 
  
• Additionally, there might be a Securities Transaction Tax (STT), which is like a tax you pay when you buy or sell options, and it’s collected by the government.

It’s essential to keep these charges in mind while trading options in India, just as you’d consider your expenses when planning a visit to a theme park. Different brokers may have different fee structures, so it’s wise to compare and find the most cost-effective option for your options trading adventure in India!

The Greeks of Options Trading

The question is – what are the Greeks of options trading? No, we’re not talking about ancient philosophers. These are rather Greek symbols assigned to find and label the market risk to help traders understand and manage their options positions.

Delta

Think of Delta as the speedometer of your option. It tells you how much the option’s price is likely to move in response to a RS 100 change in the underlying asset’s price. For example, if an options has a Delta of RS 70, it suggests that for every RS 100 increase in the stock price, the options price will rise by RS 70.

Gamma

Gamma is like Delta’s sidekick. It measures how fast Delta itself changes. In other words, it tells you how much the Delta might increase or decrease as the stock moves. This is crucial for managing risk in dynamic markets.

Theta

Theta is the clock ticking on your option’s time value. It represents the daily loss in the option’s price due to the passage of time. As an options holder, Theta reminds you that time is money, and the longer you wait, the more value your options loses.

Vega

Vega measures an option’s sensitivity to changes in implied volatility. In simple terms, it tells you how much an option’s price is likely to benefit or loss for every 1% change in implied volatility. Traders use Vega to assess how market volatility might affect their positions.

Rho

Rho is the least talked-about Greek, but it’s still important. It measures how much an option’s price is likely to change for a 1% change in interest rates. Typically, Rho is more significant for longer-term options.

Understanding these Greeks is like having a navigation system for your options trades. They help you assess and adjust your risk exposure, providing valuable insights into how your options might behave in different market conditions. So, as you venture into the world of options trading, keep these Greeks in mind – they might just become your trusted allies in the markets.

What Do Critic Say?

Critics of options trading puts a unique viewpoint in this matter. Comparing it with catching a tricky butterfly with your hands – options trading is not easy and most people get lost and loose it all, believing on the news and reports. According to the data, 70% – 80% of options expire without being used. This is one of the reasons why you should know it all from inside out before jumping into the ocean options trading. 

Another point that our expert traders and instructor emphasize on every class is not believe on market news, reports, or any sort of insider tip. Market is risky and believing untrusted information increases the risk. It’s important to know the beats of the songs to synchronize with dynamic market on every rhythm. 

Ramesh Sharma, expert trader quoted, “It’s important to learn to drive a car before focusing on how to control it first.” Professional focuses on learning the dance of options trading – it may take time, but once you master your dance steps, you can wiggle your way to success.

In A Nutshell

Options trading is your short-cut to heaven or hell – the choice is yours to make! As critics raise valid concerns, if you approach towards it with well-thought-out plan and the right guidance, you can be master of your destiny. On the other side, the data of people who lost it all is higher than the ones who gained. You can either pick one of best course of learning technical analysis, or you go with the one of the most reliable GTF Options course and start a safe yet consistent journey toward your generational wealth. 

FAQs

Ready to dive into the exciting world of options trading? Join the GTF Options – Course today and unlock the secrets to successful trading.

Over the years, experts in the stock market have developed various techniques and strategies to study price charts. These techniques eventually help in forecasting the price movement of the stock. One such technique is the candlestick chart patterns. 

The double top pattern and the double bottom pattern are one of the prominent candlestick chart patterns. These patterns help in indicating possible trend reversals.

The double top and double bottom chart pattern is one of the easiest and most reliable candlestick chart patterns. The double top pattern helps in forecasting a possible bearish trend, and the double bottom pattern helps in forecasting a possible bullish trend.

What is the Double Top Pattern?

The double top pattern is formed at the end of the upward rally or the uptrend. In the uptrend, the price keeps hitting a new high every time, creating different resistance zones. But, when the price consolidates between the same resistance zone two times, the double top pattern is formed. Here, the price is restrained to go up from a certain point. 

No new resistance zone has been created at this point. Thus, when the price of the stock is not able to pass above a certain resistance level, the double top pattern is formed. This signals the start of a reverse trend in the price of stock. If the formation of a double top pattern falls in the supply zone, then it is highly probable that the price will go down after the pattern formation. 

The shape of the pattern is similar to the “M” shape. Here the peaks of “M” are at the resistance zone from where the price is unable to go up. After the “M” pattern is formed, the breakout point comes at the support zone, from which the downtrend starts.

How to Spot a Double Top Pattern?

The double top pattern helps in identifying when the price of the stock is going to witness a bearish trend reversal. It can be interpreted as:

The buildup: This pattern is formed in an upward rally. In the upward rally, the price keeps making a new high consecutively. Whereas, at one point, the price stops increasing and hits the same high twice at the same price range, here the double top pattern is formed. This is because, the buying pressure has stopped, and now sellers are overtaking the market. 

Same high: When the price is unable to go up after hitting the same high, an “M” shape pattern is formed.  As the pattern is made after the buying pressure reduces, it signals a bearish trend may start by ending the uptrend. 

Breakout point: After hitting the same high twice when the price comes down, it is highly probable that a trend reversal can be seen after the price crosses the neckline. Here, the breakout point is when the price crosses the neckline. Thus, selling in the underlying can be seen. 

Let’s understand it in a simple way when the rally started from 100 and hit a high of 120, but then it bounces down to 110, which leads to the formation of half “M”. When the price has again risen from 110 to 120 but is unable to go higher than 120, the double top pattern is signaled. As the price is unable to go up after 120, it starts dropping. 

Following, the price hits 100, and this was the starting point of the pattern also, the neckline of the pattern is also in this range. When the price hits 100, the double top pattern completes, and after the breakout, a bearish trend is expected.

What is Double Bottom Pattern?

The double bottom pattern is formed at the end of the downward rally or the downtrend. In the downtrend, the price keeps hitting a new low every time, creating different support zones. But, when the price consolidates between the same support zone two times, the double bottom pattern is formed. Here, the price stops falling after a certain point. No new support zone is created at this point in the downtrend.

Thus, when the price of the stock is not able to go below a certain support level, the double bottom pattern is formed. This signals the start of a reverse trend in the price of stock. Thus, the price is expected to go up from here. If the formation of a double bottom pattern falls in the resistance zone, then it is highly probable that the price will go up after the pattern formation. 

The shape of the pattern is similar to the “W” shape. Here the bottom points of “W” are at the support zone from where the price is unable to go down. After the “W” pattern is formed, the breakout point comes at the resistance zone, from where the uptrend starts. The pattern is formed when the selling pressure reduces in the market and the buying starts.

How to Spot Double Bottom Pattern?

The double bottom pattern helps in identifying when the price of the stock is going to witness a bullish trend reversal. It can be interpreted as:

The buildup: This pattern is formed in the downward rally. In the downward rally, the price keeps making a new low consecutively. Whereas, at one point, the price stops falling and hits the same low twice, here the double bottom pattern is formed. This is because, the selling pressure has stopped, and now buyers are overtaking the market. 

Same low: When the price is unable to go down after hitting the same low, a “W” shape pattern is formed.  As the pattern is made after the selling pressure reduces, it signals a bullish trend reversal. 

Breakout point: After hitting the same low twice when the price comes up, it is highly probable that a trend reversal can be seen after the price crosses the neckline. Here, the breakout point comes when the price crosses the neckline. Then the increase in price can be seen.

Let’s understand it in a simple way when the rally started from 120 and hit a low of 100, but then it again rises back to 110, which leads to the formation of half “W”. When the price has fallen from 110 to 100 again but is unable to go lower than 100, the double bottom pattern is formed.

As the price is unable to go down after 100, it starts to go up again. Following, the price hits 120. This was the starting point of the pattern, the neckline of the pattern is also in this range. Here, the breakout point is at 120. After 120, it is highly probable that the price will go up, resulting in a trend reversal.

Double Top vs Double Bottom

Trading in Double Top Pattern

Trading in the double top is done by short-selling the stock. This is because the double top pattern signals the start of a downtrend leading to a fall in prices. 

Before you start to trade, analyze the pattern well with the technical analysis. You can also take the help of indicators like RSI and MACD as an add-on for confirmation of the pattern. 

As you know, the double top pattern is formed in an uptrend and resembles the “M” shape. Aggressive traders tend to take entry into the trade when the downtrend starts after the formation’s second peak. Whereas, the conservative traders wait for the downtrend to reach the breakout point. The breakout point is at the support level or the neckline. Traders who want to play it trade conservatively, take entry into the trade at the support level and enjoy the downtrend. 

In the end, when the trend starts to reverse after the price falls down, an exit in the trade can be taken. At this point, traders buy the stock and book profits after exiting the short position.

Be Cautious: Unlike derivatives, short trades in the equity cannot be carried forward, only intraday day can be done. So plan your trades accordingly in this scenario.

Trading in Double Bottom Pattern

Trading in the double bottom is done by buying the stock at the dip. This is because the double bottom pattern signals the start of an uptrend and the end of the downtrend leading to an increase in the prices. 

Before you start to trade, analyze the pattern well with the technical analysis. You can also take the help of indicators like RSI and MACD as an add-on for confirmation of the pattern. 

As you know, the double bottom pattern is formed in a downtrend and resembles the “W” shape. Aggressive traders tend to take entry into the trade when the uptrend starts after the formation’s second bottom of “W”. Whereas, conservative traders wait for the uptrend to reach the breakout point. The breakout point is at the resistance level also called the neckline. 

In the end, when the trend starts to reverse after the price has increased to a point, an exit in the trade can be taken. At this point, traders sell the stock and book profits.

Limitation of Double Top and Double Bottom 

Although, double-top and double-bottom patterns have helped traders in recognizing the possible trend reversal for a long time. There are still some limitations in the pattern. The pattern is quite common in the candlestick charts and is seen often. But, it is not always reliable. For the higher probability of trades to be successful, one should check whether the pattern is forming the demand and supply zones which are commonly known as support or resistance.

Using these patterns with knowledge of Demand and Supply theory lowers the risk of trapping. If the breakout point of the double top pattern falls in the supply zone then only the pattern is said to be more reliable. Otherwise, it may be a false signal. Whereas, in the double bottom pattern, the breakout point should fall in the demand zone, otherwise it is also a false signal.

Conclusion

Finally, double top pattern and double bottom pattern are useful for detecting future trend reversals in financial markets. While these patterns provide insight into market sentiment shifts, traders must also contend with their subjectivity, false signals, and the impact of market noise. Using these patterns in conjunction with other indicators and risk management approaches as part of a holistic trading strategy can improve decision-making and contribute to better informed and profitable trading outcomes.

FAQs

If you’re ready to explore the stock market like a Pro, we’ve got one of the most reliable technique for you – Learn more

Overview

Trading in the stock market is majorly based on technical analysis. This technical analysis comprises of different skills and attributes. Traders need a strong command or grip on chart analysis, trade theories, and price action to make the right move at the right time. In technical analysis, one of the major skills taught is analyzing candlestick charts and identifying the forming patterns. 

Though there are numerous candlestick patterns, they have been categorized well. But, One of the most studied categories is the bullish candlestick patterns. This pattern of the candlestick indicates that the stock is going to see a positive uptrend as the buying pressure is increasing.

What are Bullish Candlestick Patterns?

In technical analysis, a lot of candlestick chart patterns are involved. One of them is the bullish candlestick patterns. This pattern forecasts the upward movement of stock. Though nothing can be guaranteed with any chart pattern, it just gives an idea or roadmap for the trading strategy. There are several bullish candlestick patterns that can be observed in charts, they all indicate different types of movement. One needs to have in-depth technical knowledge of charts to understand those patterns and predict the movement of stock. Here are the different bullish candlestick patterns:

1. Hammer:

Hammer pattern can be seen anywhere, but traders take advantage of it when it’s seen at the support zone. A hammer pattern is when the lower wick of the candle is longer than the body, representing the actual shape of the hammer. It represents the buying pressure, this further indicates that the downtrend is likely to end and the price of the stock may go up.

2. Inverted Hammer:

This is similar to the actual hammer pattern, the only difference it has is, it has a longer upper wick and a very short or no lower wick. Earlier, this pattern was used in the resistance zone, and selling pressure was increased for the stock. As time passed, the pattern has undergone several modifications. Traders have also started to use an inverted hammer in the support zone. This pattern represents another bullish movement in the stock. It is formed when buying pressure created by bears has failed to drag down the price of the stock. Thus, indicating an upward trend in the stock price.

3. Bullish Engulfing:

It is one of the most prominent bullish candlestick patterns in technical analysis. It is formed when the green candle totally engulfs or covers the previous red candle from top to bottom. Usually, it is seen after consecutive red candles, and the formation of a bullish engulfing candle indicates the break in a downtrend and the start of a new uptrend. Traders take entry at this point which surges the buying pressure. 

4. Morning Star:

This pattern comprises three candlesticks: a bearish candle, a base candle or doji, and a bullish candle. After consecutive red candles, when traders get indecisive about selling the stock, a doji or base candle is formed at the support zone. After, doji, a new green candle is formed that signals the start of an uptrend. Collectively, these three candles are called morning stars. It indicates a new rally and signals the start of an uptrend in the market. Traders usually take entry in the trade when this pattern appears at the support zone.

5. Three White Soldiers:

One of the most prevalent and easiest bullish candlestick patterns to understand is three white soldiers. A rally of three consecutive green candles can be seen in this pattern, this indicates the uptrend in the stock. These green candles do not have long wicks, instead have a long body indicating positive buying behavior. After moving from the support zone, the formation of three white soldiers can increase the probability of successful trade.

6. Doji:

This pattern of candlesticks has long wicks on both sides and a very small body, indicating the nominal difference between the opening and closing price. A Doji candlestick is a price action pattern that can be found both on support and resistance zones and traded respectively. When this pattern is formed in an uptrend, then the buyers are getting indecisive about selling the stock, thus indicating a reverse trend. Whereas, the opposite can be experienced in a downtrend. Whereas, the Doji pattern is less significant in non-trending markets as it creates indecision for the traders, as markets are not certain during these times time.

7. Bullish Harami:

It is a candlestick pattern that indicates a reversal of a bearish trend. A green candle is formed after a downtrend. This green candle is smaller than the previous red candle, indicating the reversal trend in the stock movement. Traders take advantage of this bullish candlestick patterns and take entry into the trade, as the price is forecasted to go up after this pattern.

Bottom Line

Candlestick patterns are far more advanced and reliable than the other types of charts in the stock market. The technical analysis of trading is based on candlestick patterns, they showcase the market sentiments along with the price movement. This greatly helps in predicting the further movements of the stock. The bullish candlestick patterns act as signals for traders. They significantly help traders in predicting an uptrend in the stock price. Though, a trader should thoroughly learn about technical analysis from experts to excel in trading.

Options trading gives a fascinating and open door to novices to enter the world of financial business sectors and possibly benefit from cost outcomes without really possessing the basic resources. Investors can profit from this adaptable and potential financial instrument in both bullish and bearish markets. This blog will help you understand the concept of option trading if you are new to it.

Options trading for beginners is a type of derivative market in which traders can buy or sell options contracts. Traders can use these contracts to buy or sell an underlying asset at a predetermined price, known as the strike price, within a predetermined time frame, known as the expiration date. However, they are not required to do so.

How do options trading for beginners work?

The purchase or sale of options contracts is part of options trading. A predetermined number of shares of an underlying asset, such as stocks, commodities, or indices, are represented by these contracts. By correctly predicting the direction of the underlying asset’s price movement, traders can profit from options.

There are a variety of options trading strategies, each with its risk-reward profile and goal. Long calls and long puts Traders can profit from a rising asset price with a long call option, while they can profit from a falling asset price with a long put option. Leveraged exposure to price changes is provided by these strategies.

Advantages of options trading for beginners

• Leverage options let traders control a large number of underlying assets with a small premium investment. options trading for beginners is an appealing strategy for investors looking for higher returns because this leverage amplifies both potential gains and losses.
• Hedging is the process used in options to offset potential losses in other positions. Protective puts and collar strategies can be used by traders to reduce downside risk and provide protection against price fluctuations.
• Although options tradings carry risk systematic risk management strategies can help you minimize the losses Traders have a predetermined risk-to-reward ratio because the maximum loss is limited to the premium paid for the options contract.

How Options Trading Works for Beginners

There are several ways to trade options:

1. Buying Call Options: Traders can make money by purchasing call options if the price of the underlying asset rises above the strike price before the option’s expiration date. Traders can use this strategy to take part in price rises while only taking on the premium they pay.
2. Buying Put Options: Traders seek to profit from price declines by purchasing put options. Put options gain value if the price of the underlying asset falls below the strike price before the expiration date.
3. Selling Call Options: When you sell call options, you give another person the right to buy the underlying asset from you at a certain price within a certain amount of time. You receive the premium in consideration for this obligation. If the price of the underlying asset stays below the strike price until the contract expires, this strategy will make money.
4. Selling Put Options: When you sell put options, you give another person the right to sell the underlying asset to you at a certain price within a certain amount of time. You get the premium in return. If the price of the underlying asset remains above the strike price until the contract expires, this strategy will result in profits.

Risk Management in Options Trading for Beginners

To safeguard your capital and reduce losses, effective risk management is essential in options trading. Some essential methods are as follows:

1. Setting Stop-Loss Orders By automatically closing out a position when the price reaches a predetermined level, stop-loss orders can help limit losses.
2. Risk can be reduced By diversifying your options( hedging) trades across various calls and puts. Any single trade or market event will have less of an effect on you if you spread out your investments.
3. Position Sizing To effectively manage risk, it is essential to carefully determine the appropriate position size based on your risk tolerance and account balance. With the right position size, you won’t put too much money at risk in a single trade.

Options Trading Strategies

There is a wide range of options trading strategies that can be used to achieve various trading goals. Some of the most popular include:

Covered Call Selling

Call options against assets you already own is the covered call strategy. It allows you to profit from the stability or slight price increase of the underlying asset while also generating income from the premium received.

Long Straddle

In a long straddle, you buy both a call and a put option with the same strike price and expiration date at the same time. Regardless of whether the market goes up or down, this strategy makes money when prices go up or down a lot

Long strangle

The neutral strategy known as the Long Strangle (also known as the Buy Strangle or Option Strangle) involves simultaneously purchasing Slightly OTM Put Options and Slightly OTM Call Options with the same underlying asset and expiration date. When the trader anticipates high volatility in the underlying stock shortly, this long-strangle strategy may be utilized. It’s a method with a lot of potential for reward and little risk.

Iron condor

An options strategy known as an iron condor has four strike prices: two calls (one long and one short), two puts (one long and one short), and all of them have the same expiration date. The iron condor makes the most money when the underlying asset closes at expiration between the intermediate strike prices.

Iron Butterfly

The Iron Butterfly is a method for trading options that uses four different contracts to try to make money from the movement of futures and/or options that work within a certain range. Predicting a region at a time when the value of options is anticipated to be on the decline is the key to success with this strategy, which is intended to take advantage of a decrease in implied volatility.

Protective Put

Buying put options on an existing stock position to safeguard against potential downside risks is the protective put strategy. The gains will be compensated for by the put options if the stock price falls.

Bull Call Spread

Buying call options at a lower strike price and selling them at a higher strike price at the same time is a bull call spread. When a moderate price rise is anticipated, this strategy is used.

Bear Put Spread

Buying put options at a higher strike price and selling put options at a lower strike price at the same time is a bear put spread. When a moderate price decline is anticipated, this strategy is used.

More strategies are used in options trading for beginners apart from the above-mentioned ones.

Common Mistakes to Avoid When Trading Options for Beginners

1. Options trading for beginners can be complicated, so it’s important to spend time learning the basics.
2. To make informed trading decisions, educate yourself on options strategies, risk management methods, and market analysis.
3. Consistent success in options trading for beginners necessitates a clearly defined trading plan.
4. Your objectives, tolerance for risk, entry and exit strategies, and position sizing guidelines should be outlined in your plan.
5. Emotional decision-making and excessive trading Frequent trading without a clear strategy can increase market volatility exposure and incur excessive transaction costs.
6. Poor trading outcomes can also result from emotional decision-making motivated by greed or fear.

Conclusion

Options trading for beginners presents an exciting opportunity to investigate the financial markets. You can increase your chances of success in this dynamic trading arena by having a solid understanding of the fundamentals, practicing effective risk management strategies, and continuously learning new things. Keep in mind to start small, diversify your trades, and create a clear trading strategy. options trading for beginners has the potential to become a valuable addition to your investment portfolio with practice and determination.

FAQs

Options trading is a popular investment strategy that offers flexibility and potential profit opportunities in various market conditions. Whether you’re a beginner or an experienced trader, understanding and implementing effective strategy for options trading can significantly enhance your chances of success. In this Blog, we will explore a range of strategy for options trading, from basic to advanced techniques, along with important factors to consider and risk management tips.

Introduction to Options Trading

Options trading is a financial derivative that gives investors the right, but not the obligation, to buy or sell an underlying asset at a predetermined price (strike price) within a specific period (expiration date). They provide a unique way to profit from price movements in stocks, indices, commodities, or other assets, without directly owning the underlying asset.

Basic Strategies for Options Trading:

1. Covered Call Selling

The covered call strategy involves buying call options on assets you already own. It permits you to benefit from the stability or slight cost increment of the essential resource while likewise starting income from the premium got.

2. Long Straddle

You buy both a call and a put option at the same time in a long straddle, with the same strike price and expiration date. However, when prices significantly rise or fall, this strategy for options trading succeeds regardless of market conditions.

3. Long strangle

The neutral strategy referred to as the Long Strangle, which is also referred to as the Buy Strangle or Option Strangle, entails simultaneously purchasing Slightly OTM Put Options and Slightly OTM Call Options that have the same underlying asset and expiration date. This long-strangle strategy for options trading can be utilized when the trader anticipates high volatility in the underlying stock in the near future. A method with little risk and a lot of potential for reward.

4. Iron condor

The iron condor option strategy for options trading has four strike prices: There are two calls—one long and one short—and two puts—one long and one short—with the same expiration date. The iron condor makes the most money when the underlying asset closes at expiration between the intermediate strike prices.

5. Iron Butterfly

The Iron Butterfly is a strategy for options trading options that try to profit from the movement of futures and/or options that work within a certain range by using four different contracts. The key to success with this strategy, which is designed to take advantage of a decrease in implied volatility, is predicting a region at a time when the value of options is anticipated to be declining.

7. Bull Call Spread

A bull call spread is when you buy call options at a lower strike price and sell them at a higher strike price at the same time. This tactic is utilized when a moderate price increase is anticipated.

8. Bear Put Spread

A bear put spread is when you buy put options with a higher strike price and sell put options with a lower strike price at the same time. This strategy for options trading is utilized when a moderate price decline is anticipated.

Factors to Consider in Options Trading

When trading options, it’s important to consider various factors that can impact their value and overall profitability:

Implied Volatility

Implied volatility represents the market’s expectation of future price fluctuations. Higher implied volatility generally leads to higher option prices, providing more potential for profits but also higher risks.

options greeks

Options Greeks, such as delta, gamma, theta, and Vega, help measure and understand the sensitivity of option prices to changes in underlying asset price, and volatility. These metrics are valuable in selecting the right options and strategy for options trading.

Liquidity and Open Interest

Liquidity and open interest are essential considerations when trading options. High liquidity ensures more effortless execution of trades, while genuine interest reflects the number of outstanding contracts and can indicate market interest and potential trading opportunities.

Technical Analysis for Options Trading

Technical analysis techniques can provide valuable insights into potential entry and exit points for options trades.

Support and Resistance Levels

Identifying support and resistance levels helps determine potential price reversals, guiding when to enter or exit options positions.

Chart Patterns

Chart patterns, such as triangles, double tops, or head and shoulders, can assist in predicting future price movements and identifying opportunities for options trading.

Conclusion

Options trading gives investors the chance to manage risk, diversify their portfolios, and potentially earn a lot of money. Traders can increase their chances of success in this dynamic market by implementing efficient strategy for options trading , managing risks, and comprehending trading psychology. Keep in mind, practice and persistent learning are central to turning into a talented choices merchant.

FAQs

We can easily trade when we know the direction of a particular stock and when we are familiar with some best options strategy.

Suppose if the underlying is in uptrend we can buy call or short put and if underlying is in downtrend we can buy put or sell calls.

But when we come to the sideways market its tough challenge to make money from options and a there is a high degree of risk especially in debit strategy (long call/long put).

Best Options strategy in sideways market

Here are the few strategies though which we can get a decent output.

Short strangle (credit/non-directional)

Iron condor (credit/non-directional)

Short straddle (credit/non-directional)

Iron butterfly (credit/non-directional)

All of these are called as non-directional strategies which are used in sideways market.

Now a question comes in mind why 4?

All of them have different characteristics based on the market conditions.

Short Strangle and Iron Condor can be used when we know the upper and lower range in which underlying is going to be range bound based on demand and supply or support and resistance or through another technical analysis.

Short Strangle is used when the market is sideways and we are expecting the price to be remains range bound in upcoming days. The strategy can be initiate by selling a call and a selling a put

(Both Anchor Units). The call strike which we select to sell should be at or above the upper range, similarly the put strike should be at or below the lower range.

As we can see Iron Condor is slightly different from Short Strangle.

Adding two offset units into short strange will give us Iron Condor.
The major benefit for Iron Condor is now our risk is also limited.
The Offset Units strike price of long call (+CE) should be above the short call (Deep OTM), similarly strike price of long put (+PE) should be below short put (Deep OTM).

Short Straddle and Iron Butterfly can be used when we are pretty much confident that underlying is going to be remain at around current market price only, that can be analyze through the our Trading in the Zone course or through any other technical analysis.

Short Straddle is used when the market is sideways and we are expecting the price to be remains around current market price only in upcoming days. The strategy can be initiate by selling a call and a selling a put (Both Anchor Units).

Both call and put should be of same strike price and same expiry

As long as price remains around current market price and as long as days pass, the strategy will count money for us.

Please not there is an unlimited risk characteristics in Short Straddle

Iron Butterfly is the modified version of the Short Straddle, in which two offset units are added to prevent from unlimited risk, one is long call and one is long put.

Long call strike price should be deep OUT-THE-MONEY above the upper range, similarly long put should be deep OUT-THE-MONEY below the lower range.

Anchor unit will be same like Short Straddle (same strike and same expiry).

Which strategy is safer:-

Obviously the strategy which prevent from unlimited risk is more safe.

Iron Condor and Iron Butterfly are the safe strategy, which will prevent us not only from unexpected gap up and gap down but also prevent us from a sudden hike in implied volatility.

Best Option Trading Strategies You Need to Know

You might have come here after reading how risky options trading is and it has full potential to empty your accounts. But, take a reality check here, options trading is risky, but risk is surely manageable with a good approach and advanced knowledge. After this risk is managed, the sky is the limit in options trading. Options trading is way more advanced and exciting than just buying and selling stocks. Different options trading strategies come with the opportunity to make money in every market condition. Indeed, the one who has mastered technical analysis related to options trading has the capability to accumulate good wealth over time. There are two types of market, bullish, bearish, and sideways, and so the type of options trading strategies. 

Bullish Option Strategies 

These are strategies used by a trader when they anticipate an up move in the market. It mandates the trader to thoroughly study the expected upmove and timeframe going to come. The art of catching quick-up moves brings a lot of opportunities here. Here are some different bullish options strategies that professional traders use: 

Bull Call Spread

It is an excellent hedging technique used by a lot of traders out there. Here, a trader buys in-the-money(strike price lower than the current price of the underlying asset) call option and sells the out-the-money (strike price higher than the current price of the underlying asset) call option. This is done for the same underlying asset and for the same expiry date. This gives a win to the trader from both sides. But, this strategy should only be implemented when the trader is sure about the upmove in the market. 

Bull Put Spread

This is used when a moderately bullish market is anticipated. Here, the trader sells an in-the-money put option and buys an out-the-money put option. The theta decay benefits highly in selling of put option. This strategy is implemented when the market has seen a good downfall a little bullish vision can be expected lately. 

Bull Call Ratio Backspread

This is indeed a risky but highly rewarding options strategy. Here, the trader sells an in-the-money/at-the-money (itm / atm) call option and buys two or more call options of a specific strike price. This is all done for the same expiration date. It should be practiced when you are sure about the good upward rally in the underlying asset. As the price of the underlying asset will reach the strike price of out-the-money calls, the premium will give unwavering returns. Further, the premium of the sold call option will fall near zero, giving you double gains.

Synthetic Call

Here, the trader first purchases the stock in bulk and aims for an up move. But, to protect their invested money, they buy a put option of the same strike price as the current price of the stock. It works as an excellent insurance to the purchased stock. Even if, the stock goes in an unfavorable direction for a while, the put option compensates for the losses of stocks.

Bearish Option Trading Strategies

Bearish Option Trading Strategies are used by traders who anticipate a decline in the market. They aim to make money by taking short positions in the market, the more the market falls, the more their gains increase. Here are different types of bearish option strategies used by technical traders: 

Bear Call Spread

Here the trader sells an in-the-money call option and buys an out-the-money call option for a higher strike price. It gives the seller a limited gain or reward opportunity due to theta or time decay. The gains are guaranteed here if the stock declines or even remains steady. Both the call options are of the same underlying asset and of expiry date.

Bear Put Spread

In a bear put spread, the trader again benefits from a decline in the market. Here the the trader buys out-the-money put options and sells in-the-money put options. The gain here is also limited, but the gains are guaranteed if you have forecasted a decline in the market. 

Strip

This is the market-neutral strategy that involves holding long positions of both call and put for the same strike (at-the-money) price at the same expiry date. The profits are made when the market moves either side. But the profits are doubled when the market moves to the downside rather than to the upside. Hence, it is a bearish option strategy. 

Synthetic Put

Similar to synthetic call, it is used to protect the short position the trader has taken in the stock. But, to protect their invested money, they buy a call option at an at-the-money price. It works as an excellent insurance to the short position. Even if, the stock goes in an unfavorable direction for a while, the call option compensates for the losses of stocks.

Neutral Option Trading Strategies

Neutral option trading strategies are employed by investors who anticipate little to no significant price movement in the underlying asset. These strategies aim to profit from low volatility and can be implemented when the investor expects the price of the underlying security to remain within a specific range.

Long Straddles and Short Straddles 

• Long Straddle:
  • Definition: A long straddle is an options trading strategy where an investor simultaneously purchases a call option and a put option with the same strike price and expiration date for the same underlying asset.
  • Objective: The goal of a long straddle is to profit from significant price movement in the underlying asset. This strategy is used when the investor expects a substantial move in either direction but is uncertain about the direction.
  • Risk and Reward: The risk is limited to the total premium paid for both options. The potential reward is theoretically unlimited if the underlying asset makes a significant move in either direction, covering the combined premiums paid for the call and put options.
• Short Straddle:
  • Definition: A short straddle is an options trading strategy where an investor sells both a call option and a put option with the same strike price and expiration date for the same underlying asset.
  • Objective: The goal of a short straddle is to profit from low volatility, with the expectation that the underlying asset will remain relatively stable and not experience significant price movement.
  • Risk and Reward: The risk in a short straddle is theoretically unlimited if the underlying asset experiences a substantial price movement in either direction. The potential reward is limited to the combined premiums received for selling the call and put options.

Long Strangle and Short Strangle 

• Long Strangle:
  • Definition: A long strangle is an options trading strategy where an investor simultaneously purchases an out-of-the-money (OTM) call option and an out-of-the-money put option for the same underlying asset. Both options have the same expiration date, but their strike prices are different.
  • Objective: The goal of a long strangle is to profit from a significant price movement in the underlying asset, regardless of the direction. This strategy is employed when the investor anticipates a substantial move but is uncertain about whether it will be upward or downward.
  • Risk and Reward: The risk is limited to the total premium paid for both options. The potential reward is theoretically unlimited if the underlying asset experiences a significant price movement in either direction, surpassing the combined premiums paid for the call and put options.
• Short Strangle:
  • Definition: A short strangle is an options trading strategy where an investor sells an out-of-the-money (OTM) call option and an out-of-the-money put option for the same underlying asset, with both options sharing the same expiration date.
  • Objective: The goal of a short strangle is to profit from low volatility, with the expectation that the underlying asset will remain within a certain price range until the options expire.
  • Risk and Reward: The risk is theoretically unlimited if the underlying asset experiences a substantial price movement in either direction. The potential reward is limited to the combined premiums received for selling the call and put options. However, it’s important to note that the risk in a short strangle is typically considered higher than the potential reward.

Summary:-

Since all are the credit strategy. As long as market will remain sideways, these strategies are going to count money for us. But the implementation of these strategies should be based on Implied Volatility.
If implied Volatility is extremely high Short Strangle and Short Straddle are the best strategy.
If implied volatility is high but not super inflated then Iron Condor is the best strategy. If implied volatility is neither high nor low means it is mid-point (68 % time according to 1 STD) then Iron Butterfly is the best strategy.
If you like this post, then I’d really love it if you can share it on

Frequently Asked Questions