Three Core Strategies for Options Trading
There are more than 18 option trading techniques that the majority of option investors and traders employ in their regular trading tweaking three core strategies. Mastery of these three key tactics, on the other hand, can turn you into a seasoned options trader for online trading in India.
Three Trading Option Strategies
- a) The Condor
- b) The Combo
- c) Butterfly
Strategy of the Condor
There are four major combinations in the Condor strategy. There are two for a constant market and two for a fluctuating (volatile) market. Short call with put condor is for volatile or dynamic market, while long call with put condor is for fixed market. The in-the-money and out-of-the-money call options with an equal number of contract units are available in the former strategy.
Profit can be easily made with this approach if the stock price does not display volatility and moves away from the up and down breakeven levels. The short call with put condor approach, like the long call with put condor method, is for volatile markets and is done in four steps. The difference is that in a short call with put condor, the strike prices of the purchased stock options must be within the specified strike prices of the sold options. Profit is evident when the stock price moves out of the up side and down side breakeven levels for short calls using the put condor strategy. According to actuals, the upside breakeven level is established by adding the whole stock position to total pay outs or receiving the highest strike price. The downside breakeven point is computed by subtracting the total pay or receive for the whole position from the strategy’s lowest strike price.
Bullish and bearish traders combine in the Combo Strategy, which caters to two types of investors. Bullish traders prefer the bullish combo method, while bearish investors prefer the bearish combo.
This method consists of two steps: purchasing and selling, which means buying out of money and selling in money. Profit is recorded if the stock price rises more than the higher strike price. However, if the stock price falls below the lowest strike price, the trader will lose money. You will not lose any money if the security’s value varies between the higher and lower strike prices. This method can provide you endless profit, alternatively it also can produce an unlimited loss undermined by the market direction, depending on the strategy chosen by you.
Butterfly Spreading Techniques
The condor and butterfly dispersal strategies are very identical. There are also four different combinations: long at the money call with put butterfly spread, short at the money call with put butterfly spread, and long at the money call with put butterfly spread.
Read more: Indian Stock Market Smart Investing
For a fixed market, a long at the money call with a put butterfly spread is used, whereas a short at the money call with a put butterfly spread is used for a dynamic market.
Buying in the money and out of the money call options, followed by selling at the money call option, are the four steps in the long at the money call butterfly spread. Add the number of contract units for the money call option to the number of contract units for the in and out of the money options. Profit can be expected if the stock price stays within the up and down side breakeven ranges.
The up side breakeven level is calculated by multiplying the stock position’s total pay-out by the highest strike price. The down side breakeven level is calculated by subtracting the lowest strike price from the total stock position pay outs.
Short at the money call butterfly spreads are created by deferring or selling in and out of the money call option, then buying at the money call option. The number of contract units at the money option must be two times that of the in and out of the money options. Profit potential can be noticed as long as the stock price has moved away from the up and down side breakeven ranges. This method yields a small profit. Similarly, if the stock price does not move in the expected direction, it results in a limited loss.
Now that you’ve learned about some of the most significant methods in option trading, it’s time to learn about demat accounts and how to register a demat account online.