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Options Strategies


Options Strategies

There are lot of Options Strategies which people can trade with very low investment. Investors can make different Options Strategies suitable to their Risk and Return Profile.
We can make limited Risk as well as unlimited Risk profile Strategy

Bull Call Spread:

Bull Call Spread is a Debit spread Strategy. Here you buy lower strike Call Option and Sell Higher strike Call Option. It makes money when market goes up and lose money when market falls down. The Break Even Point of Bull Call Spread comes at Lower Strike Price plus net premium paid.

Bull Put Spread:

Bull Put Spread is a Credit Spread Strategy. Here you buy lower strike Put and Sell Higher strike Put Option. It makes money when market goes up and lose money when market falls down. The Break Even Point of Bull Put Spread comes at Higher Strike Price minus Net premium received.

Bear Call Spread:

Bear Call Spread is a Credit Spread Strategy. Here you buy higher strike Call Option and Sell lower strike Call Option. It makes money when market falls down and lose money when market goes up. The Break Even Point of Bear Call Spread is Lower Strike Price plus net premium received.

Bear Put Spread:

Bear Put Spread is a Debit Spread Strategy. Here you buy higher strike Put Option and sell lower strike Put Option. It makes money when market falls down and lose money when market goes up. The Break Even Point of Bear Put Spread is Higher Strike Price minus net premium paid.

Long Straddle Strategy:

When you buy Call and Put Option of same Strike price, it is called LongStraddle. LongStraddle strategy makes money when market moves either side. The maximum loss in LongStraddle is net premium paid when market expires at the strike you have bought. The maximum profit is unlimited.
You will be having almost NeutralDelta, LongGamma, LongVega & ShortTheta profile at At the moneyLongStraddle Strategy.
This Strategy is very useful when you have volatile view of market but you may incur huge loss if time passes and movement doesn’t come.

Short Straddle Strategy:

When you sell Call and Put Option of same Strike price, it is called ShortStraddle. ShortStraddle strategy makes money when market remains in a range. The maximum loss in ShortStraddle is unlimited when market moves either side. The maximum profit is limited up to net premium received when market expires at the strike you have sold.

You will be having almost NeutralDelta, ShortGamma, ShortVega & LongTheta profile at At the moneyShortStraddle Strategy.
This Strategy is very useful when you have range bound view of market but you may incur huge loss if market moves either side.

Long Strangle Strategy:

When you buy Call and Put Option of different Strike prices, it is called Long Strangle. Long Strangle strategy makes money when market moves either side. The maximum loss in Long strangle is net premium paid when market expires between the strikes you have bought. The maximum profit is unlimited.

You will be having almost NeutralDelta, LongGamma, LongVega & ShortTheta profile at At the moneyLong Strangle Strategy.

This Strategy is very useful when you have volatile view of market but you may incur huge loss if time passes and movement doesn’t come.

Short Strangle Strategy:

When you sell Call and PutOption of different Strike prices, it is called Short Strangle. Short Strangle strategy makes money when market remains in a range. The maximum loss in Short strangle is unlimited when market moves either side. The maximum profit is limited up to net premium received when market expires between the strikes you have sold.

You will be having almost NeutralDelta, ShortGamma, ShortVega & LongTheta profile at At the moneyShort Strangle Strategy.

This Strategy is very useful when you have range bound view of market but you may incur huge loss if market moves either side.

Long Butterfly Strategy:

Butterfly is a 3 leg Strategy. When we buy single quantity of lower strike, sell double quantity of middle strike and buy single quantity of upper strike, it becomes LongButterfly. It is having limited risk as well as limited returns profile.

It makes maximum profit when market expires at the strike you have sold and incurs maximum loss of net premium paid when market expires below lower strike or above higher strike.

LongButterfly Strategy is very useful when Implied Volatility are high and market looks range bound.

Short Butterfly Strategy:

Like LongButterfly, Short Butterfly is also a 3 leg Strategy. When we sell single quantity of lower strike, buy double quantity of middle strike and sell single quantity of upper strike, it becomes ShortButterfly. It is having limited risk as well as limited returns profile.

It makes maximum profit of net premium received when market expires below lower strike or above higher strike and incurs maximum loss when market expires at the strike you have bought.

ShortButterfly Strategy is very useful when Implied Volatility are low and market looks volatile.

Long Iron Butterfly Strategy:

Long Iron Butterfly Strategy is a 4 leg Strategy. It is the combination of Calls and Puts. When we Sell Call and Put Option of same strike and buy upper strike Call and buy lower strike Put, it becomes Long Iron Butterfly. Indirectly, here we have taken one Long Strangle + one ShortStraddle Position.

Iron Butterfly is also having limited risk as well as limited returns Profile. It makes maximum profit when market expires at the strike you have sold and incurs maximum loss when market expires below lower strike or above higher strike.

Short Iron Butterfly Strategy:

Short Iron Butterfly Strategy is also a 4 leg Strategy. When we buy Call and Put Option of same strike and sell upper strike Call and sell lower strike Put, it becomes Short Iron Butterfly. Indirectly, here we have taken one LongStraddle + one Short Strangle Position.

Short Iron Butterfly is also having limited risk as well as limited returns Profile. It makes maximum profit when market expires below lower strike or above higher strike and incurs maximum loss when market expires at the strike you have bought.

Long Condor Strategy:

When we sell Call and Put Options of different strike prices and buy lower strike Put and higher strike Call, it becomes LongCondor Strategy. LongCondor is a 4 leg Strategy. Indirectly here we made one ATMShort Strangle and one OTMLong Strangle.

LongCondor is having limited risk and limited returns profile. It makes maximum profit when market expires between the strikes you have sold and incurs maximum loss when market expires below lower strike or above higher strike.

This is a very rewarding strategy. It gives time value with very low risk as you hedge your unlimited loss risk by buying OTMOptions.

Short Condor Strategy:

When we buy Call and Put Options of different strike prices and sell lower strike Put and higher strike Call, it becomes ShortCondor Strategy. ShortCondor is a 4 leg Strategy. Indirectly here we made one ATMLong Strangle and one OTMShort Strangle.

ShortCondor is having limited risk and limited returns profile. It makes maximum profit when market expires below lower strike or above higher strike and incurs maximum loss when market expires between the strikes you have bought.

This strategy makes money when market becomes very volatile.

Long Calendar Spread:

When we sell current month Option and buy the same strike of next month, it becomes Long Calendar Spread. This is a net debit spread. We should note that Long Calendar is having VegaLong Position so risk and rewards gets change as the Volatility changes. Calendar Spread trader should always focus on Volatility as it is very important factor for this Strategy.

Short Calendar Strategy:

When we buy current month Option and sell the same strike of next month, it becomes Short Calendar Spread. This is a credit spread. We should note that Short Calendar is having VegaShort Position so spread makes profit when Volatility falls down and incurs losses when Implied Volatility goes up.

Price Ratio Front Spread:

Price Ratio Spread means we buy one strike Option and sell another strike Options in such a way so that net cash inflow / outflow becomes zero or very near to zero. For e.g. if we buy 100 quantity of ATMCall Options and sell 200 quantity of OTMCall Options, so it can become an example of Price Ratio Front Spread if total premium paid for ATMCall is same as total premium received for OTMOptions.

Price Ratio Front Spread is having limited profit and unlimited loss profile. It is a very rewarding strategy when market does not look very volatile.

Price Ratio Back Spread:

When we sell one strike Option and buy more quantity of another strike Options in such a way so that net cash inflow / outflow becomes zero or very near to zero, it is called Price Ratio Back Spread. For e.g. if we sell 100 quantity of ATMCall Options and buy 200 quantity of OTMCall Options, so it can become an example of Price Ratio Back Spread if total premium received for ATMCall is same as total premium paid for OTM Options.

Price Ratio Back Spread is having unlimited profit and limited loss profile. It is a very rewarding strategy when market looks very volatile.

Delta Ratio Front Spread:

DeltaRatio Spread means we buy one strike Option and sell another strike Options in such a way so that net portfolio Delta becomes zero or very near to zero. For e.g. if we buy 100 quantity of ATMCall Options and sell 200 quantity of OTMCall Options, so it can become an example of Delta Ratio Front Spread if total portfolio DeltaLong for ATMCall is same as total portfolio DeltaShort for OTMCall Options sold.

Delta Ratio Front Spread is having limited profit and unlimited loss profile. It is a DeltaNeutral Strategy.

Delta Ratio Back Spread:

Delta Ratio Back Spread means we sell one strike Option and buy more quantity of another strike Options in such a way so that net portfolio Delta becomes zero or very near to zero. For e.g. if we sell 100 quantity of ATMCall Options and buy 200 quantity of OTMCall Options, so it can become an example of Delta Ratio Back Spread if total portfolio DeltaShort for ATMCall is same as total portfolio DeltaLong for OTMCall Options bought.

Delta Ratio Back Spread is having unlimited profit and limited loss profile. It is a DeltaNeutral Strategy.

Long Gamma Strategy:

When we buy Options in such a way so that it becomes DeltaNeutral, it is called LongGamma Strategy. LongGamma strategy is good when we are having the view that Implied Volatility of Options is very low and actual forecasted Volatility looks very high.

The main risk in LongGamma Strategy is Time to maturity. As it is having ShortTheta so it incurs losses if time passes and movement doesn’t come.

Trader always try to keep his DeltaNeutral so he always make money by neutralizing the Delta as he is having LongGamma.

Short Gamma Strategy:

When we sell Options in such a way so that it becomes DeltaNeutral, it is called ShortGamma Strategy. ShortGamma strategy is good when we are having the view that Implied Volatility of Options is very high compare to actual forecasted Volatility.

The main object of ShortGamma trade is to earn time value of Options but main risk in this strategy is that it carries unlimited loss scenario.

Trader always try to keep his DeltaNeutral so he always lose money by neutralizing the Delta as he is having ShortGamma and earns money as time passes as he is having LongTheta.

Volatility Spread:

Volatility Spread Strategy focuses to earn between the Skew of volatilities of two strikes. There is a good relationship between Volatility of two strikes of same underlying. So it creates lot of opportunities when it moves or changes.

It is a very scalable Strategy that provides logical returns with very low risk profile. Traders who have very good command on Volatility and Greeks can run this strategy. The main advantage of this strategy is that it can be done in any stock, commodities, currencies or indices, wherever Options are available.

It is advisable to have algorithm Program Trading Software to execute these trades accurately.

Box Spread:

Box Spread is a 4 leg lock Strategy which creates two Synthetic Futures. Here we buy Call and sell Put of one strike and create one SyntheticLongFuture and simultaneously we sell Call and buy Put of another strike and create one SyntheticShortFuture. So the combination of SyntheticLongFuture and ShortFuture is called Box Spread.

This is having limited risk and limited returns profile.

Put Call Parity:

Black Scholes OptionsPricing Model proves that there is a perfect Correlation between Call, Put and Future Price. But in live market as all the three securities are traded individually and independently so it creates lots of misparity when market moves. So it creates Opportunity for PutCall Parity Strategy. It is a risk free arbitrage opportunity.

Please note that we have to pay Securities Turnover Tax STT on derivatives trades in India, which can impact the profitability of this Strategy. So we should consider this before evaluating the viability of Strategy.

Vertical Spreads:

Vertical Spread can be done by using two different Strike Options but of same maturity. There are mainly two types of Vertical Spread i.e. Debit Spread and Credit Spread. When we pay net premium at the time of initiating the Strategy is called net debit spread as we have to pay net premium here. Bull Call Spread and Bear Put Spreads are the example of Debit Spread. Similarly if we receive net premium at the time of initiating the Strategy, it becomes net credit spread. Bear Call Spread and Bull Put Spread are the example of Net Credit Spread.

Horizontal Spreads:

Horizontal Spreads can be made by using same strike but different maturity Options. Calendar Spread is the example of Horizontal Spread as we buy and sell Options of same strike but of different maturities.

Diagonal Spreads:

Diagonal Spreads can be made by using different strikes as well as different maturities. So when we buy Nifty 5000 Oct Month Option and sell Nifty 5200 Nov Month, it becomes Diagonal Spread as both strike and maturity are not same for both the Options.

Which Strategies are good during lower Implied Volatility?

Price Ratio Back Spread can be a very good strategy during low Volatility. As we normally expect Implied Volatility to go up so we try to make VegaLong Strategy. We can also make LongStraddle, Long Strangle, ShortButterfly, ShortCondor, Long Calendar etc. when implied Volatility looks lower compare to expected movement.

Which Strategies are good during higher Implied Volatility?

Price Ratio Front Spread can be a very good strategy during high Volatility. As we normally expect Implied Volatility to go down so we try to make VegaShort Strategy. We can also make ShortStraddle, Short Strangle, LongButterfly, LongCondor, Short Calendar etc. when implied Volatility looks higher compare to expected movement.

When to initiate Lower Strike Straddle Strategy:

Straddle is the combination of same strike Call and Put Options. When we make LongStraddle, we expect movement in underlying. So when we buy lower strike Straddle we expect market to go up and when we sell lower strike Straddle we expect market to fall down to the level of Strike which we have sold.

When to initiate Higher Strike Straddle Strategy:

Similarly as above, if we are bearish in market then we should buy higher strike Straddle as it will make fast returns compare to ATMStraddle when market falls down and if we are having bullish view then we should sell higher strike Straddle.

When to initiate Lower Strike Strangle Strategy:

The main difference between Straddle and Strangle is that we use same strike Call and Put in Straddle while we use different strikes in Strangle. Like Straddle, we can buy lower strike Strangle for bullish view strategies and can sell lower strike Strangles for bearish view strategies.

When to initiate Higher Strike Strangle Strategy:

When we buy Call and Put Options of different strikes it becomes Long Strangle and if we consider both the strikes of Call and Put above the current Spot price it becomes Higher Strike Strangle Strategy. We should buy higher strike strangle if we think that market is volatile and there is high probability of market to fall down and similarly we can sell higher strike strangle if we feel that market is range bound and slightly bullish.

What is plain Vanilla Options?

When we use single Option to trade, it is called Plain Vanilla Option. For example, if I am having bullish view and I buy Call Option or if I am having bearish view and I buy Put Option.

How to Sell Volatility

Volatility is having direct relationship with Call Option and Put Option. So as the Volatility increases, Call Premium and Put Premium increases. So when we feel that Volatility is going to fall down, we can sell Options.

How to Buy Volatility

Similarly when we are having bullish view on Volatility or we feel that Volatility should go up, we can buy Options. As Volatility is having positive relationship with Call and Put so when Volatility will rise, Premium will also rise and as we have bought those Options, so we will make profit. So we should buy Options when we want to buy Volatility.

What is Time Value?

Option Premium is the combination of two different Values. 1. Intrinsic Value & 2. Time Value. As Option writer gives the right to buy or sell underlying at a predetermined price within a specified time period. So it shows that writer carry the risk till the maturity. So if maturity period is higher than writer is going to take higher risk and if maturity period is lower than writer will have lower risk. So maturity time is having perfect relation with risk associated in Option writing. So Option writer charges additional premium on the basis of Time and that premium is called Time Value.

Indirectly Option is having only Intrinsic Value at the time of Expiry as there is no time remaining now for maturity so there should not be any time value in those Options.

How to earn Time Value

We can earn time value by selling Options and managing the portfolio Delta continuously. Option value reduces as the time passes. Normally when we sell Option we want market to remain constant as we carry the risk of unlimited loss on movement. So it is very much required to





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