Examples of Smart Strategies

9.1 Bullish Strategies Example

A. Long Call

Here’s the payoff diagram for the Long Call strategy.

• The red dashed line indicates the breakeven price at ₹110, where profit is zero.
• The green dashed line marks the strike price at ₹105.
• The profit curve illustrates how the total profit increases as the stock price rises above the breakeven point.

The Long Call Strategy is a bullish options trading strategy where an investor buys a call option, expecting the price of the underlying asset to rise significantly above the strike price before the option’s expiration date.

Example:

Scenario:

• Stock: ABC Ltd.
• Current Stock Price: ₹100
• Call Option Strike Price: ₹105
• Call Option Premium: ₹5
• Option Expiry: 1 month

Action:
The trader buys 1 call option for ₹5 (premium) per share. Assuming 100 shares per contract, the total cost is:
Premium Paid=₹5×100=₹500

Outcomes at Expiry:

If the stock price stays at ₹105 or below
The option expires worthless as there’s no advantage in buying the stock at ₹105 (strike price) when it costs ₹105 or less in the market.

Loss: ₹500 (premium paid)

If the stock price rises above ₹105
The option gains intrinsic value. For example:

1. If ABC’s price is ₹120:
   Profit per share = ₹120 (market price) – ₹105 (strike price) – ₹5 (premium) = ₹10
   Total profit = ₹10 × 100 shares = ₹1,000
2. Net Profit:
   Profit = Total profit – Premium paid = ₹1,000 – ₹500 = ₹500

Breakeven Point:

The breakeven stock price is the strike price + premium paid.

In this case:
Breakeven=₹105+₹5=₹110

At ₹110, there is no profit or loss. Above ₹110, the strategy starts making a profit.

Key Insights:

• Maximum Loss: Limited to the premium paid (₹500).
• Maximum Profit: Unlimited, depending on how high the stock price rises.
• Ideal Market View: The trader expects a significant rise in the stock price.

B. Bull Call Spread

The Bull Call Spread is a bullish options strategy that involves buying a call option at a lower strike price and simultaneously selling a call option at a higher strike price. This strategy reduces the upfront cost compared to a long call but caps the maximum profit.

Here is the payoff diagram for the Bull Call Spread strategy:

• Orange Line: Breakeven price at ₹108, where there is no profit or loss.
• Red Line: Maximum loss of ₹300 occurs if the stock price is ₹105 or below at expiration.
• Green Line: Maximum profit of ₹700 is achieved if the stock price reaches or exceeds ₹115

Example:

Scenario:

Stock: ABC Ltd.

• Current Stock Price: ₹100
• Buy Call Option Strike Price: ₹105 (Lower Strike)
• Premium Paid: ₹5
• Sell Call Option Strike Price: ₹115 (Higher Strike)
• Premium Received: ₹2
• Net Premium Paid: ₹5 – ₹2 = ₹3

Key Points:

• Max Loss: Limited to the net premium paid (₹3 × 100 shares = ₹300).
• Max Profit: Limited to the difference between strike prices minus the net premium paid.
  Max Profit= (₹115−₹105−₹3) ×100=₹700
• Breakeven Point: Lower strike price + net premium paid.
  Breakeven= ₹105+ ₹3= ₹108

Outcomes at Expiry:

1. If Stock Price ≤ ₹105:
   Both options expire worthless.

Loss: ₹3 × 100 = ₹300 (net premium paid).

2. If Stock Price is between ₹105 and ₹115:
   The lower strike call gains intrinsic value, but the upper strike call offsets some profit.

Example: Stock Price = ₹110:
Profit = (₹110 – ₹105) – ₹3 = ₹2 per share.
Total Profit = ₹2 × 100 = ₹200.

3. If Stock Price ≥ ₹115:
   The lower strike call gains maximum value, but the upper strike call caps the profit.

Profit: ₹700.

Breakeven Calculation:

The breakeven stock price is the lower strike price + net premium paid:
Breakeven=₹105+₹3=₹108

Key Insights:

• Risk: Limited to ₹300 (net premium paid).
• Reward: Capped at ₹700.
• Market View: Mildly bullish.

C. Bull Put Spread

Here’s the payoff diagram for your Bull put spread strategy:

• The blue dashed line represents the payoff for selling a put option with a strike price of ₹860.
• The orange dashed line shows the payoff for buying a put option with a strike price of ₹830.
• The green solid line indicates the net payoff for the strategy

Example

Suppose you believe the price of Reliance Industries, currently trading at ₹850, will rise or remain above a certain level:

• Sell a Put Option: Strike price ₹860, premium ₹30.
• Buy a Put Option: Strike price ₹830, premium ₹10.

Profit and Loss

• Maximum Profit: Achieved if the stock price remains at or above the higher strike price (₹860). The profit is the net premium received (₹30 – ₹10 = ₹20).
• Maximum Loss: Occurs if the stock price falls to or below the lower strike price (₹830). The loss is the difference between the strike prices minus the net premium received (₹860 – ₹830 – ₹20 = ₹10).

Breakeven Point : The breakeven point is the higher strike price minus the net premium received (₹860 – ₹20 = ₹840).

Key points on the chart:

1. Maximum Profit of ₹20 is achieved when the stock price is at or above ₹860.
2. Maximum Loss of ₹10 occurs when the stock price is at or below ₹830.
3. The breakeven point is at ₹840 (marked by the red dashed vertical line).

D. Long Call Butterfly Strategy

Example

Let’s assume the net premium paid for setting up this strategy is ₹20.

• Lower Strike Price (Buy): ₹950
• Middle Strike Price (Sell, double): ₹1,000
• Higher Strike Price (Buy): ₹1,050

Payoff and Profit Calculation

• Maximum Profit: Occurs if the stock price at expiration is exactly at the middle strike price (₹1,000). The profit is calculated as the difference between the middle and the lower strike prices, minus the net premium paid. In this example: ₹1,000 – ₹950 = ₹50, minus the ₹20 net premium = ₹30 per share.
• Maximum Loss: The maximum loss is limited to the net premium paid to set up the strategy. In this example, the loss is ₹20 per share.

Break-even Points:

• Lower Break-even: Lower strike price + net premium = ₹950 + ₹20 = ₹970.
• Upper Break-even: Higher strike price – net premium = ₹1,050 – ₹20 = ₹1,030.

This strategy is most effective when the trader expects the stock to hover around the ₹1,000 mark by expiration. The Long Call Butterfly offers a limited risk, limited reward profile, making it a conservative strategy suitable for stable market conditions.

E. Short Put Strategy

Sell one put option: By selling the put option, the trader receives a premium. For instance, let’s consider an underlying stock currently priced at ₹1,000, and we sell a put option with a strike price of ₹950.

Example

Assume the premium received for selling this put option is ₹30.

• Strike Price (Sell): ₹950

Payoff and Profit Calculation

• Maximum Profit: The maximum profit is the premium received from selling the put option. In this example, the profit is ₹30 per share.
• Maximum Loss: The risk is significant since the trader must buy the stock at the strike price if the option is exercised and the stock price falls significantly. The potential loss occurs if the stock price drops below the strike price (₹950).

For instance, if the stock price falls to ₹900, the effective purchase price would be ₹950 (strike price) – ₹30 (premium received) = ₹920, resulting in a ₹20 loss per share.

The Short Put strategy benefits from stable to rising stock prices. While the potential profit is limited to the premium received, the risk can be considerable if the stock price declines significantly below the strike price.

9.2. Bearish Strategies Examples

A. Bear call spread

 The graph illustrates the profit and loss profile of a Bear Call Spread strategy for Reliance Industries with the given parameters.

Key takeaways from the graph are:

• The maximum profit of ₹10 is achieved when the stock price stays below ₹860.
• The maximum loss of ₹10 occurs when the stock price goes above ₹880.
• Between ₹860 and ₹880, the profit/loss gradually declines.

Example

Let’s say you believe the price of Reliance Industries, currently at ₹850, will moderately decline1. You decide to implement a Bear Call Spread:

• Sell a Call Option: Sell a call option with a strike price of ₹860 for a premium of ₹20.
• Buy a Call Option: Buy a call option with a strike price of ₹880 for a premium of ₹10.

Profit and Loss

• Maximum Profit: The net premium received (₹20 – ₹10 = ₹10) is your maximum profit.
• Maximum Loss: The difference between the strike prices minus the net premium received (₹880 – ₹860 – ₹10 = ₹10) is your maximum loss.

B. Bear Put Spread

Here’s the payoff diagram for the bear put spread strategy involving Tata Motors:

• The blue dashed line represents the payoff for buying a put option with a strike price of ₹460.
• The orange dashed line shows the payoff for selling a put option with a strike price of ₹430.
• The green solid line indicates the net payoff for the strategy.

Key points on the chart:

1. Maximum Profit of ₹20 is achieved when the stock price is at or below ₹430.
2. Maximum Loss of ₹10 occurs when the stock price is at or above ₹460.
3. The breakeven point is ₹450, where the strategy neither makes a profit nor incurs a loss

Example

Let’s say you believe the price of Tata Motors, currently at ₹450, will decline:

• Buy a Put Option: Buy a put option with a strike price of ₹460 for a premium of ₹15.
• Sell a Put Option: Sell a put option with a strike price of ₹430 for a premium of ₹5.

Profit and Loss

• Maximum Profit: The maximum profit is achieved if the stock price falls to or below the lower strike price (₹430). The profit is calculated as the difference between the strike prices minus the net premium paid (₹460 – ₹430 – ₹10 = ₹20).
• Maximum Loss: The maximum loss occurs if the stock price remains at or above the higher strike price (₹460). The loss is limited to the net premium paid (₹15 – ₹5 = ₹10).

C. Bear Iron Condor

Here’s the payoff chart for your Bear Iron Condor strategy on Reliance Industries.

Key Observations:

1. Maximum Profit: ₹20, achieved when the stock price is between ₹830 and ₹860 at expiry.
2. Maximum Loss: ₹20, incurred when the stock price is below ₹810 or above ₹880 at expiry.
3. Breakeven Range: ₹810 to ₹880. Within this range, the strategy remains profitable.

 Example

Let’s say you believe the price of Reliance Industries, currently at ₹850, will moderately decline and you decide to implement a Bear Iron Condor:

Sell a Call Spread:

• Sell a Call Option: Strike price ₹860, premium ₹20.
• Buy a Call Option: Strike price ₹880, premium ₹10.

Sell a Put Spread:

• Sell a Put Option: Strike price ₹830, premium ₹15.
• Buy a Put Option: Strike price ₹810, premium ₹5.

Profit and Loss

• Maximum Profit: Achieved if the asset’s price is between the middle strike prices (₹830 and ₹860). The profit is the net premium received (₹20 + ₹15 – ₹10 – ₹5 = ₹20).
• Maximum Loss: Occurs if the asset’s price moves significantly away from the middle strike prices. The loss is the difference between the adjacent strike prices minus the net premium received (₹20 in this example).

Breakeven Points

• The lower breakeven point is the lower sold put strike price minus the net premium received.
• The upper breakeven point is the higher sold call strike price plus the net premium received.

D. Bear Butterfly Spread

 Here is the payoff diagram for the option strategy you described. It visualizes the profit and loss at different stock prices at expiration:

• Strike Price ₹860 (Sell Put): The red dashed line marks the strike price for the sold puts. The position of the price relative to this strike affects the loss from the sold puts.
• Strike Price ₹830 (Buy Put): The green dashed line marks the strike price for the bought put. The profit from the bought put increases as the stock price declines below ₹830.
• Strike Price ₹800 (Buy Put): The orange dashed line marks the strike price for the second bought puts, providing additional profit as the stock price falls further below ₹800.

 Example

Let’s say you believe the price of Reliance Industries, currently at ₹850, will moderately decline:

• Sell Two Put Options: Sell put options with a strike price of ₹860 for a premium of ₹20 each.
• Buy One Put Option: Buy a put option with a strike price of ₹830 for a premium of ₹15.
• Buy Two Put Options: Buy put options with a strike price of ₹800 for a premium of ₹10 each.

Profit and Loss

• Maximum Profit: Achieved if the asset’s price falls to the lower strike price (₹800). The profit is calculated as the difference between the strike prices minus the net premium paid (₹860 – ₹800 – ₹25 = ₹35).
• Maximum Loss: Occurs if the asset’s price remains at or above the higher strike price (₹860). The loss is limited to the net premium paid (₹20 + ₹20 – ₹15 – ₹10 – ₹10 = ₹25).

9.3. Neutral Strategies Examples

A. Calendar Call

Here is the profit and loss diagram for the Calendar Call option strategy based on the example you provided. The chart illustrates the profit/loss based on the stock price at expiration:

• Maximum Profit occurs when the stock price remains at or below the strike price (₹860), where the net premium received (₹10) is the profit.
• Maximum Loss is experienced if the stock price rises significantly above ₹860, and the loss is limited to the net premium paid for the longer-term call (₹10).

The red dashed line at ₹860 represents the strike price for both options. ​

Example

Let’s say you believe the price of Reliance Industries, currently at ₹850, will remain stable in the near term but might rise in the longer term:

• Sell a Near-Term Call Option: Sell a call option with a strike price of ₹860 and an expiration date one month from now for a premium of ₹20.
• Buy a Longer-Term Call Option: Buy a call option with the same strike price of ₹860 but with an expiration date three months from now for a premium of ₹10.

Profit and Loss

• Maximum Profit: The maximum profit is achieved if the stock price remains at or below the strike price (₹860) at the expiration of the near-term call option. The profit is the net premium received (₹20 – ₹10 = ₹10).
• Maximum Loss: The maximum loss occurs if the stock price rises significantly above the strike price before the expiration of the near-term call option. The loss is the net premium paid (₹10).

B Callendar Put

The payoff diagram above illustrates the following:

Near-Term Put Option Payoff (Orange Dashed Line): This option generates a profit if the stock price falls below ₹840 before its expiration. However, as it expires, its maximum loss is the premium received (-₹10).

Long-Term Put Option Payoff (Blue Dashed Line): This option gains value if the stock price drops significantly below ₹840 over the longer term. Its cost is the premium paid (-₹20).

Net Payoff (Green Line):

• Represents the combined effect of selling the near-term put and buying the longer-term put.
• If the stock price stays above ₹840, the near-term put expires worthless, and the strategy incurs a net cost of ₹10 (the premium difference).
• If the stock price falls significantly, the longer-term put’s profit outweighs the loss on the near-term put, limiting the downside.

 Example

Imagine you believe the price of Reliance Industries, currently at ₹850, will remain stable in the near term but might decline in the longer term:

• Sell a Near-Term Put Option: Sell a put option with a strike price of ₹840 and an expiration date one month from now for a premium of ₹10.
• Buy a Longer-Term Put Option: Buy a put option with the same strike price of ₹840 but with an expiration date three months from now for a premium of ₹20.

Profit and Loss

• Maximum Profit: The maximum profit is achieved if the stock price remains at or above the strike price (₹840) at the expiration of the near-term put option. The profit is the net premium received (₹10 – ₹20 = -₹10, which means you initially paid a net premium of ₹10, but as the near-term put expires worthless, you can sell the longer-term put).
• Maximum Loss: The maximum loss occurs if the stock price declines significantly below the strike price before the expiration of the longer-term put option. The loss is limited to the net premium paid (₹20 – ₹10 = ₹10).

C. Short Straddle

The payoff diagram above illustrates the short straddle strategy:

1. Call Option Payoff (Orange Dashed Line): This represents the payoff for selling the call option. The loss increases as the stock price rises above ₹850, while the maximum profit is limited to the premium received (₹30).
2. Put Option Payoff (Blue Dashed Line): This represents the payoff for selling the put option. The loss increases as the stock price falls below ₹850, with the maximum profit also limited to the premium received (₹30).
3. Net Payoff (Green Line):

• The combined payoff shows the strategy’s overall performance.
• Maximum Profit: ₹60, achieved when the stock price remains at ₹850 at expiration.
• Breakeven Points: ₹790 (lower) and ₹910 (upper). The strategy incurs losses if the stock price moves outside this range.
• Maximum Loss: Theoretically unlimited, as the stock price moves significantly away from ₹850 in either direction.

 Example

Suppose you believe the price of Reliance Industries, currently at ₹850, will remain relatively stable:

• Sell a Call Option: Strike price ₹850, premium ₹30.
• Sell a Put Option: Strike price ₹850, premium ₹30.

Profit and Loss

• Maximum Profit: The maximum profit is achieved if the stock price remains exactly at the strike price (₹850) at expiration. The profit is the total premium received (₹30 + ₹30 = ₹60).
• Maximum Loss: The maximum loss is theoretically unlimited if the stock price moves significantly in either direction. The loss increases as the stock price moves further away from the strike price.

Breakeven Points

• The lower breakeven point is the strike price minus the total premium received (₹850 – ₹60 = ₹790).
• The upper breakeven point is the strike price plus the total premium received (₹850 + ₹60 = ₹910).

D. Short Strangle

The payoff diagram above illustrates the short strangle strategy:

1. Put Option Payoff (Blue Dashed Line): This represents the payoff for selling the put option with a strike price of ₹820. The loss increases if the stock price falls below ₹820, while the maximum profit is capped at the premium received (₹20).

2. Call Option Payoff (Orange Dashed Line):  This represents the payoff for selling the call option with a strike price of ₹880. The loss increases if the stock price rises above ₹880, with the maximum profit capped at the premium received (₹20).

3. Net Payoff (Green Line): The combined payoff shows the overall performance of the strategy.

• Maximum Profit: ₹40, achieved if the stock price remains between ₹820 and ₹880 at expiration.
• Breakeven Points: ₹780 (lower) and ₹920 (upper). Losses occur if the stock price moves outside this range.
• Maximum Loss: Theoretically unlimited, as the stock price moves significantly away from ₹820 or ₹880.

 Example

Suppose you believe the price of Reliance Industries, currently at ₹850, will remain relatively stable:

• Sell an Out-of-the-Money Call Option: Strike price ₹880, premium ₹20.
• Sell an Out-of-the-Money Put Option: Strike price ₹820, premium ₹20.

Profit and Loss

• Maximum Profit: The maximum profit is achieved if the stock price remains between the strike prices (₹820 and ₹880) at expiration. The profit is the total premium received (₹20 + ₹20 = ₹40).
• Maximum Loss: The maximum loss is theoretically unlimited if the stock price moves significantly in either direction beyond the strike prices. The loss increases as the stock price moves further away from the strike prices.

Breakeven Points

• The lower breakeven point is the put strike price minus the total premium received (₹820 – ₹40 = ₹780).
• The upper breakeven point is the call strike price plus the total premium received (₹880 + ₹40 = ₹