What are the Top Options Trading Strategies?

What is Options Trading?

Options are financial contracts that grant the buyer the right, but not the responsibility, to purchase or sell an underlying asset at a given price within a predetermined time frame. For buyers, it is used to speculate on price changes or hedge risk. Call and put options are the two primary categories of options.

With a call option, you can purchase shares at a certain price prior to a specific date. If traders believe that the stock price is going to rise, they usually purchase a call option.

You can sell a share at a predetermined price before a specific date if you have a put option. If you believe that the stock price will decline, you may purchase a put option.

What are the Different Types of Options Strategies?

There are different types of options trading strategies you can use in options trading. You can find some of them below in different categories:

Bullish Options Trading Strategies

1. Bull Call Spread: 

A bull call spread is an options trading strategy that is included in the category of debit spreads. Primarily, you can still purchase a long call option in the bull call spread to show your bullish opinion, but you may reduce your risk by selling a call option to offset some of the expenses.

This strategy allows you to buy one call option and simultaneously sell another with the same expiry date but a lower cost and a higher strike price.

2. Bull Put Spread:

You might employ a bull-put spread strategy when you expect a little increase or stability in a stock or asset but do not want to take on excessive risk. This strategy involves buying a put option with a lower strike price while simultaneously selling a put option with a higher strike price. The expiration date of both choices is the same.

You are paid more when you sell the higher strike put. The lower strike put is then purchased with a portion of this money. Your net premium, or your highest potential profit from this exchange, is the difference between what you get and what you spend.

3. Call-Ratio Backspread:

A call-ratio backspread is an advanced bullish technique that involves purchasing more out-of-the-money (OTM) calls than selling in-the-money (ITM) calls, usually in a 2:1 ratio.

An OTM call option is one in which the strike price exceeds the stock's current market price. This indicates that there is no inherent value to the option, and you would only make money if the stock price increased over the strike price before the option expires.

OTM calls are often less expensive to purchase since, without a significant upward increase in the stock, there is less chance that they will turn a profit.

In contrast, an ITM call option is one in which the strike price is less than the going price. This gives the option some inherent value, as you could purchase the shares for less than their market value if you exercised the option immediately. Since ITM calls are already profitable at the present price point, they are more expensive.

4. Synthetic Call

Purchasing the underlying stock or futures and a put option at the same time creates a synthetic call. With the possibility for infinite upside and restricted downside, this combination replicates the reward of a long call option.
Investors who want to hold equities for voting rights or dividends but also want downside protection without selling their holdings may find it helpful.

Bearish Options Trading Strategies

1. Bear Call Spread

The bear call spread is a two-leg option strategy, which is used when the market is ‘moderately bearish.’ Using this technique, a trader purchases a longer-term call option with a higher strike price and the same underlying commodity and expiry date while concurrently selling a shorter-term call option.

One makes a net profit when the option premium on the call sold is more than the call's buying price.

2. Bear Put Spread

Traders can use a bear put spread when a trader or investor believes that the price of a security or asset will drop marginally. You can use a bear put spread by buying put options and selling the same quantity of puts on the same asset with the same expiry date at a comparatively low target price.

The highest profit a trader may achieve with this approach is equal to the difference between these two strike prices minus the total cost of the options.

3. Synthetic Put

If you wish to profit from a possible decline in a stock or other asset with little risk, you can employ a synthetic put. Selling the underlying stock or a futures contract is the first step in setting up a synthetic put. Secondly, you purchase a call option with the same expiration date.

Since it closely resembles the payout from just purchasing a put option, this combination is known as ‘synthetic.’ Similar to a put, your short position is beneficial if the stock price declines. Since the call option allows you to repurchase the shares at a predetermined price, your losses on the short position are limited if the price increases significantly.

4. Strip

A trader must use the strip strategy if they are negative about the market's direction and positive about volatility. This approach includes purchasing two lots of ‘At-the-Money Put Options’ and ‘At-the-Money Call Options.’

For instance, the NIFTY is trading at 22,000. You should buy:

• 1 lot of 22,000 call options (ATM Call)
• 1 lot of 22,000 put options (ATM Put)

Both require the same underlying security and expiration month. A bearish form of the Strip is comparable to the typical Long Straddle.

When the underlying makes a big move at expiry, moving more positively in the direction of loss, the Strip Strategy may yield substantial returns.

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Neutral Options Trading Strategies

1. Long Strangle

The long strangle is a neutral strategy in which purchasing OTM put options and OTM call options with the same underlying asset and expiry date at the same time.

When a trader expects significant volatility in the underlying stock in the near future, they may employ this strategy. It is a low-risk strategy with a high potential reward.

The total premium paid is the maximum loss when the underlying moves considerably higher or lower at expiry. Conversely, the maximum profit occurs when the underlying moves significantly upward or downward.

2. Short Strangle

A short strangle strategy allows sellers to earn premium while providing a wide range between two breakeven points. This means that the underlying stock or index must change much more. In return, it could be beneficial to employ put and call options. Selling two options simultaneously is part of this strategy.

For instance, the NIFTY is trading at 25,000. You sell a 24,000 put for ₹200 and a 26,000 call for ₹200. You can receive a total premium of ₹400.

• Lower Breakeven = 24,000 − 400 = 23,600
• Upper Breakeven = 26,000 + 400 = 26,400

Hence, there is a chance of making a profit if NIFTY remains between 23,600 and 26,400 at expiry. You can sell a call and a put together with this strategy. So you can make a profit when NIFTY does not move much in either direction.

3. Long Straddle

Long straddles provide contract holders with defined risk and limitless profit potential. Regardless of the direction, the buyer of a straddle anticipates that the stock price will move significantly past the strikes. The stock price must go past one of the strikes by more than the premium paid to initiate the trade to profit at expiry.

You can use long straddles frequently in situations with low implied volatility (IV), where the buyer of the straddle is placing a trade that the real movement in the stock price will exceed the implied movement based on the straddle's price.

4. Short Straddle

A short straddle strategy is selling a call and a put at the same strike and expiry. You will potentially profit if the underlying asset remains stable by collecting both premiums. However, it will be highly risky if the underlying asset moves sharply in either direction. Hence, it requires careful risk management.

Note: Results can vary significantly based on market volatility and execution.

Intraday Options Trading Strategies

1. Breakout Strategy

A breakout strategy helps to find assets that have broken out of their typical trading range. As an alternative, a trader can spot assets that are about to move into a new price range.

To put it another way, traders must identify the thresholds at which share prices rise or fall. Intraday traders may think about taking long positions and purchasing shares if the stock prices move beyond the cutoff.

2. Momentum Strategy

A momentum strategy allows you to find stocks or indexes with significant momentum, either upward or downward, during the trading day. You may ride short-term trends for rapid potential gains by employing position sizing and placing trades in the direction of moment

3. Reversal Trading

After a significant move, the reversal trading method seeks to identify possible intraday trend reversals. You can initiate trades when the prevailing trend exhibits signs of exhaustion and reversal by employing technical indicators and pattern analysis. Since misleading signals might sometimes happen, risk management is essential.

4. Scalping

The scalping trading method is one of the best options trading strategies that allows you to make money from small price movements. Intraday traders frequently use this strategy while purchasing and selling commodities. Primarily, high-frequency traders use this strategy.

People should be aware that they should not focus on the technical or fundamental setup in its totality in this situation. However, when it comes to scalping, price action is more important.

Those who want to use this intraday trading strategy should ensure that the equities they select are both volatile and liquid. They also need to ensure that every order has a stop-loss.

5. Gap and Go Strategy

The gap-and-go strategy aims to find equities with no pre-market volume. These equities' opening prices differ from their closing prices from the previous day. A gap up occurs when a stock's opening price is higher than its closing price the day before.

For example, stock X closed at ₹500 yesterday and opened at ₹530 today due to little pre-market activity. There is a deficit of ₹30. If the stock keeps rising after the market opens, a trader employing the gap-and-go technique could consider purchasing it.

6. Moving Average Crossover Strategy

The moving average crossover strategy is one of the best options trading strategies, which acts as a signal that there is a change in momentum. It shows that stock or other financial asset values fluctuate above or below the moving average.

An uptrend occurs when share prices climb above the moving average. On the other hand, a downtrend occurs when stock prices fall below the moving average. Experts advise purchasing stocks or taking long positions during an uptrend.

Final Thought

Understanding the options trading strategies may help traders in choosing instruments that align with their risk tolerance and market perspective. Each has advantages and disadvantages of its own, so it is crucial to understand how they operate before using them.

It is crucial to keep in mind that although these options trading strategies provide different perspectives on the market, none of them can ensure profits.

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