Options Trading Strategies
- Thread starter Sunil
- Start date
- Tags nifty nifty options options options trading strategy
BEAR SPREAD:
USING CALLS
When to use:
When you are mildly bearish on market direction.
A call bear spread is usually a credit spread. A credit spread is where the net cost of the position results in you receiving money up front for the trade. eg. you sell one Nifty 4000 call option (receive Rs 80) and the buy one Nifty 4200 call option (Rs. 50). The net effect is a credit of Rs 30.
This type of spread is used when you are mildly bearish on market direction. Same idea as the Call Bull Spread but reversed - i.e. you think the market will go down but think that the cost of a short stock or long put is too expensive.
USING PUTS
When to use:
When you are bearish on market direction.
A Put Bear Spread has the same payoff as the Call Bear Spread as both strategies hope for a decrease in market prices. The choice as to which spread to use, however, comes down to risk/reward.
A good tip is to compare the market prices of both spreads to determine which has the better payoff for you.
USING CALLS
When to use:
When you are mildly bearish on market direction.
A call bear spread is usually a credit spread. A credit spread is where the net cost of the position results in you receiving money up front for the trade. eg. you sell one Nifty 4000 call option (receive Rs 80) and the buy one Nifty 4200 call option (Rs. 50). The net effect is a credit of Rs 30.
This type of spread is used when you are mildly bearish on market direction. Same idea as the Call Bull Spread but reversed - i.e. you think the market will go down but think that the cost of a short stock or long put is too expensive.
USING PUTS
When to use:
When you are bearish on market direction.
A Put Bear Spread has the same payoff as the Call Bear Spread as both strategies hope for a decrease in market prices. The choice as to which spread to use, however, comes down to risk/reward.
A good tip is to compare the market prices of both spreads to determine which has the better payoff for you.
PUT BACKSPREAD / PUT RATIO SPREAD
When to use:
When you are bearish on market direction and bullish on volatility.
A Put Backspread should be done as a credit. This means that after you buy 2 OTM puts and sell 1 ITM put the net effect should be a credit to you. I.e. you should receive money for this spread as your are short more than you are long. One may experiment with this ratio spread, and may even use 1:3 ratio - but risk:reward ratio should first be ascertained in each case, before initiating a position.
Put Backspread's are a great strategy if you are bullish and bearish at the same time, however, have a bias to the downside. Looking from the payoff, you can see that if the market sells off you make unlimited profits below the break even point. If, however, you are wrong about the direction and the market stages a rally instead, you still win - though your profits are limited.
You might say that this type of strategy is similar to a Long Straddle - and you would be right.
The difference is that
1) the profits are limited on one side, and
2) Backspread's are cheaper to put on.
When to use:
When you are bearish on market direction and bullish on volatility.
A Put Backspread should be done as a credit. This means that after you buy 2 OTM puts and sell 1 ITM put the net effect should be a credit to you. I.e. you should receive money for this spread as your are short more than you are long. One may experiment with this ratio spread, and may even use 1:3 ratio - but risk:reward ratio should first be ascertained in each case, before initiating a position.
Put Backspread's are a great strategy if you are bullish and bearish at the same time, however, have a bias to the downside. Looking from the payoff, you can see that if the market sells off you make unlimited profits below the break even point. If, however, you are wrong about the direction and the market stages a rally instead, you still win - though your profits are limited.
You might say that this type of strategy is similar to a Long Straddle - and you would be right.
The difference is that
1) the profits are limited on one side, and
2) Backspread's are cheaper to put on.
LONG STRADDLE
When to use:
When you are bullish on volatility but are unsure of market direction.
A long straddle is an excellent strategy to use when you think the market is going to move but don't know which way. A long straddle is like placing an each-way bet on price action: you make money if the market goes up or down.
But, the market must move enough in either direction to cover the cost of buying both options.
Buying straddles is best when implied volatility is low or you expect the market to make a substantial move before the expiration date - for example, before an earnings announcement.
When to use:
When you are bullish on volatility but are unsure of market direction.
A long straddle is an excellent strategy to use when you think the market is going to move but don't know which way. A long straddle is like placing an each-way bet on price action: you make money if the market goes up or down.
But, the market must move enough in either direction to cover the cost of buying both options.
Buying straddles is best when implied volatility is low or you expect the market to make a substantial move before the expiration date - for example, before an earnings announcement.
LONG STRANGLE
BOTH THE OPTIONS SHOULD BE OTM
When to use:
When you are bullish on volatility but are unsure of market direction.
A long strangle is similar to a straddle except the strike prices are further apart, which lowers the cost of putting on the spread but also widens the gap needed for the market to rise/fall beyond in order to be profitable.
Like long straddles, buying strangles is best when implied volatility is low or you expect a large movement of market price in either direction.
BOTH THE OPTIONS SHOULD BE OTM
When to use:
When you are bullish on volatility but are unsure of market direction.
A long strangle is similar to a straddle except the strike prices are further apart, which lowers the cost of putting on the spread but also widens the gap needed for the market to rise/fall beyond in order to be profitable.
Like long straddles, buying strangles is best when implied volatility is low or you expect a large movement of market price in either direction.
SHORT BUTTERFLY (using Call OR Put)
Components
Long two ATM options,
short one ITM option &
short one OTM option.
When to use:
When you are neutral on market direction and bullish on volatility. Neutral on market direction meaning that you want the market to move in either direction - i.e. bullish and bearish at the same time.
Short Call Butterfly's have a similar pay off to the Short Straddle except the downside risk is limited. Short Straddles have unlimited downside risk: a Short Butterfly's risk is limited to the premium paid for the three options.
Components
Long two ATM options,
short one ITM option &
short one OTM option.
When to use:
When you are neutral on market direction and bullish on volatility. Neutral on market direction meaning that you want the market to move in either direction - i.e. bullish and bearish at the same time.
Short Call Butterfly's have a similar pay off to the Short Straddle except the downside risk is limited. Short Straddles have unlimited downside risk: a Short Butterfly's risk is limited to the premium paid for the three options.
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