Option Trading Techniques & Strategies

option trading strategies

Stock market is one of the greatest wealth generators for investors. In fact, if the trading is done in a right way, the capital can grow manifold. Thus, it is very important to have the right knowledge and skills to carry out stock trading. One such strategy to earn money in the stock market is options trading. With right option trading strategies in place, one can earn good returns on regular basis. Therefore, in this article, we shall learn about the concept of option trading, its strategies, its techniques, formula and much more.

 

Firstly, let us learn about the meaning of Options

Meaning of Options Trading

Options are a derivative security. In stock option, one party sells it to another party. The option buyer has the right but not the obligation to buy or sell a stock at the agreed price within a certain time period.

 

Some of the common option trading techniques.

List of Easy to Understand Option Trading Strategies

Buying Calls

Buying call options are one of the easiest and popular ways to enter option market. This strategy is popular because the loss is very less and profits are high.

Buying Puts

When the traders feel that the market will go against the views of the call option buyer they buy put option. In fact, it is bought with the belief that the price of the stock will move downward. Furthermore, it is one of the most favourite trading styles for those who like speculation and short selling in the stock.

Bull Call Spread

Bull Call Spread Strategy involves buying a call option at a specific price and selling call option at a specific higher strike price. In this, the trader expects a moderate rise in the price of the stock. The profit and loss in this strategy depend on the closing price of the stock on the day of expiry of the contract.

 

Option trading formula for bull call spread strategy = Contract Size [(Cost Of Per Share In Call On Expiry) – (Initial Premium Paid Per Share)] + Contract Size [(Premium Collected Per Share) – (Cost Of Per Share In Call On Expiry)]

Bear Put Spread

This strategy is exactly the opposite of the bull call spread. In fact, in this formula, the trader buys a put option at a specific strike price and sells the identical number of puts at a lower strike price. Here the trader holds a bearish view on the stock and believes that the stock price shall fall moderately.

 

formula for bear spread = Contract Size [(Cost Of Per Share In Put On  Expiry) – (Initial Premium Paid Per Share)] + Contract Size [(Premium Collected Per Share) – (Cost Of Per Share In Put On Expiry)]

Protective Collar

It is one of the most common and popular option trading technique for the beginners. This strategy involves buying and selling the same number of out of the money put and call options at the same time.

 

Also LearnIntraday Trading Strategies

 

formula for protective collar = Contract Size [(Cost Of Per Share In Put On Expiry) – (Initial Premium Paid Per Share)] + Contract Size [(Initial Premium Collected Per Share) – (Cost Of Per Share In Call On Expiry)]

Long Straddle

It is one of the simplest options trading strategy for any new trader. Long straddle involves buying of call and put option at the same strike price, same expiry period and same underlying asset. This strategy is for those who believe that the price of a stock will move up.

 

formula for long straddle = Contract Size [(Cost Of Per Share In Call On Expiry) – (Initial Premium Paid Per Share)] + Contract Size [(Cost Of Per Share In Put On Expiry) – (Initial Premium Paid Per Share)]

Long Strangle

Long Strangle is similar to the long straddle. However, there is a difference which differentiates a long strangle option trading technique. In fact, in this strategy buying of call and put option is done with different strike prices. The underlying asset and period of expiry remain the same. This strategy is for those who believe that there will be a large price movement in the stock price.

 

formula for long strangle = Contract Size [(Cost Of Per Share In Call On Expiry) – (Initial Premium Paid Per Share)] + Contract Size [(Cost Of Per Share In Put On Expiry) – (Initial Premium Paid Per Share)]

Butterfly Spread

Butterfly spread is a technical. It is a combination of bull and bear spread. It is a three-leg strategy in which trade is taken at 3 different strike prices using calls and puts.

 

formula for butterfly trading = Contract Size [(Cost Of Per Share In Call On Expiry) – (Initial Premium Paid Per Share)] + 2 *Contract Size [(Initial Premium Collected Per Share)] – (Cost Of Per Share In Call On Expiry)] + Contract Size [(Cost Of Per Share In Call On Expiry) – (Initial Premium Paid Per Share)]

Iron Condor

Iron Condor strategy is one of the most complex options trading strategies for the beginners. This strategy is a combination of buying long and short positions in two different strangle strategies. This is best when the stock has low volatility and small profits are the target.

 

formula for iron condor = Contract Size [(Cost Of Per Share In Call On Expiry) – (Initial Premium Paid Per Share)] + Contract Size [(Initial Premium Collected Per Share)] – (Cost Of Per Share In Call On Expiry)] + + Contract Size [(Cost Of Per Share In Put On Expiry) – (Initial Premium Paid Per Share)] + Contract Size [(Initial Premium Collected Per Share)] – (Cost Of Per Share In Put On Expiry)]

Iron Butterfly

Iron Butterfly is another popular option trading strategy for the new traders. It involves either a long or short straddle with buying or selling of strangle.

 

formula for iron butterfly = Contract Size [(Cost Of Per Share In Call On Expiry) – (Initial Premium Paid Per Share)] + Contract Size [(Initial Premium Collected Per Share)] – (Cost Of Per Share In Call On Expiry)] + Contract Size [(Cost Of Per Share In Put On Expiry) – (Initial Premium Paid Per Share)] + Contract Size [(Initial Premium Collected Per Share)] – (Cost Of Per Share In Put On Expiry)]

 

Nifty Trading Academy is one of the most popular stock market education providers of the country. With the expertise of in-house professionals, we ensure that beginners learn how to read and understand the technical charts of the stock. We suggest the beginners about how and when to take a position in the stock on the basis of chart understanding. In fact, by joining our academy you can become a successful intraday trader. If you have any queries or want any further information, you can reach us via phone or email. We will be glad to serve you.

Hitendra Dixit Author at Nifty Trading Academy
Hitendra Dixit
I am Hitendra Dixit. I am a civil engineer, at the age of 47 I have changed my profession and came in to stock market. I got excellence award for best share market training institute in India. I provide training in live market, during training sessions I do trade with real money in front of members. Many of my members left their job and became a professional trader with my support and guidance.