Option strategy

Option strategy

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Trading in Futures and Options was introduced in the early 2000’s on the NSE. Futures was more popular among the two until the market meltdown in 2008 after which the popularity of options has increased tremendously, much more than futures today. Following are the reasons which probably attributed to the increase in popularity of options on the NSE:

1. For holding a future position, you would need NSE stipulated margins which would work upwards of Rs 25000 based on what future contract you are trading whereas in options a trader with even Rs 100 in his account could take some kind of an option position.

2. Future positions have unlimited risk, whereas in option buying the risk is limited to the premium you are paying.

3. STT(Security Transaction Tax charged by the government) for Future is charged on the contract value whereas for options it is charged on the option premium. What this means is if you buy and sell 1 lot of nifty futures at 6000, the turnover generated is Rs 6lks( 3lks+3lks). STT is 0.017% of Rs 3lks which is Rs 51, whereas if you had bought and sold an option with premium Rs 100, the turnover would have been Rs 10,000(5000+5000) and STT of Rs 0.85.

4.Options offer you an ability to setup trading strategies for multiple market scenarios.

Option Strategy is a tool which we have introduced on Zerodha Trader which suggests you and helps build option strategies. Find following brief on how to use it:

3. See the pic below to launch Option Strategy:

4. The following window opens, follow the steps as shown in the pic:

5. Once you give a view the tool will suggest you 5 different strategies, as shown below. For the example, my view is that nifty will stay between 5800 to 6200 for Nov 2013 expiry. My View is that market will remain neutral(that means neither bearish nor bullish) and I also feel that market will be in a very narrow range. This suggests me 5 different strategies as shown in the pic below.

6. If you are not able to see the prices in the strategy section, click on the restore button as shown below.

The window will look like below when you click on the restore button and the prices should start refreshing as the data is fetched from your market watch. So Ensure that the option contracts mentioned is available on the market watch as mentioned in point 2.

7. Follow the steps below to look at the payoff graph for the strategy you select.

8. Create ” My Strategy” using combinations of strategies suggested, as shown below and you can look at the payoff graph and payoff table. See the Pic below:

Yes you can trade naked options i.e buy calls/short puts if you are bullish and buy puts/short calls if you are bearish, but options as a product especially combination of nifty options offer you an opportunity to setup trades with immenese profit potential. Use this tool to help setup option strategies, study the payoff graph and proft trading options at Zerodha.

Happy Trading,

Source: http://zerodha.com/z-connect/tradezerodha/zerodha-trader-software-version/option-strategy-zerodha-trader

An option strategy refers to purchasing and/or selling a combination of options and the underlying assets in order to achieve a desired payoff. Option strategies can be created to favor different market conditions such as, bullish, bearish or neutral. The options positions consist of long/short put/call option contracts.

Depending on the need and market forecast, different strategies can be implemented. Bullish strategies are implemented when the market outlook is bullish. Similarly bearish/neutral strategies are implemented when the market outlook is bearish/neutral. The most commonly used strategies are listed below:

Covered Strategies

Covered strategies involve taking a position in the option and the underlying.

  • Covered Call: This strategy involved being long the underlying stock and short a call option on the same stock.
  • Covered Put: This involves selling a put option and being short an equivalent amount of the underlying stock.
  • Protective Put: A protective put involves buying an underlying stock and at the same time buying a put option on the same stock.

Spread Strategies

Spread strategies involve taking a position in two or more options of the same type (A spread)

  • Bull Spread: Bull spread strategy can be created with both call and put options. A bull call spread involves buying a call option with a low exercise price, and selling another call option with a higher exercise price. Both calls will have the same underlying security and expiration month.
  • Bear Spread: A bear call spread involves buying call options of a certain strike price and selling the same number of call options of lower strike price (in the money). Both calls will have the same underlying security and expiration month.
  • Box Spread: A box spread is created by a combination of a bull call spread and a bear put spread with identical expiry dates. This strategy provides minimum risk.
  • Butterfly Spread: A butterfly spread is created by using 4 option positions. A long butterfly spread is implemented as follows:
  1. Long 1 call a high strike price
  2. Short 2 calls at an intermediate strike price
  3. Long 1 call at a low strike price

  • Calendar Spread: A calendar spread involves simultaneous purchase of a call option expiring in a particular month and the sale of the identical option expiring in another month.

Combination Strategies

Take a position in a mixture of calls & puts (A combination)

  • Straddle: A long straddle involves buying one call and one put option at the same strike. Similarly a short straddle involves selling one call and one put option at the same strike.
  • Strip and Strap: A strip involves combining one long call with two long puts. A strap involves combining two long calls with one long put.
  • Strangle: A long strangle involves buying one call option and buying one put option at a lower strike. Similarly a short strangle involves selling one call option and one put option at a lower strike.

Option Strategies Spreadsheet

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Source: http://financetrain.com/types-of-option-strategies/

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