Option Trading Stratagy

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Trading Basics:

Trading Basics Firstly, which Strategy ? Position Trading Momentum or Trend trading Swing Trading Day Trading

Option Basics:

Option Basics CALLS : CALL is a contract that gives the BUYER the right to purchase stock at a certain price (strike price) at a certain date (Expiration, or the date on which the contract expires). The SELLER has the obligation to sell the stock at the strike price. PUTS : PUT is a contract that gives the BUYER the right to sell the stock at the strike price upon expiration. The SELLER has the obligation to BUY the stock at strike price. Buying Puts is the equivalent of short- selling stocks.

Other Option Trading Methods :

Other Option Trading Methods Trade Strategy Direction Option Strategy Requirement Profitability Potential for loss Trend or Momentum trading Positive (Bull) Sell PUTS High Margin Medium Medium Sell CREDIT PUT SPREADS Low Margin Medium Minimal Negative (Bear) Sell COVERED CALLS Must own underlying stock Medium Medium Sell CREDIT CALL SPREADS Low margin Medium Minimal Swing Trading Positive Buy CALLS None Very High Very High Negative Buy PUTS None Very High Very High

Options Pricing and Value :

Options Pricing and Value The price of any option (call or put) has two components : INTRINSIC VALUE: Intrinsic value reflects the amount, if any, by which an option is In-the-money (ITM). TIME VALUE: Time Value is the amount of money you pay for the length of time until the option expires.

Options Pricing and Value :

Options Pricing and Value The price of any option is influenced by six factors: The price of the underlying stock: The strike price of the option (relative to the stock price). The Time Value Volatility . Interest rates. stock dividends.

Benefits :

Benefits Leverage : The ability to use option trading strategies to leverage small amounts of trading capital permits the trader to engage in significant positions without committing excessive funds from within the larger portfolio. Limited downside risk : With most option trading strategies, the goal is not only to leverage small amounts of trading capital, but to also hedge against downside risk while leaving upside potential unrestricted. Hedging : Many option trading strategies can permit a trader to hedge against unwanted market price fluctuations in a current portfolio position. Flexibility : Overall, there area great number of various option trading strategies which may be implemented for nearly any market environment or equity position. From basic hedging strategies to complex trade setups, individual investors can use options for many different purposes.

Disadvantages :

Disadvantages Complexity : For the individual investor, option trading strategies may seem overly complex and therefore not worth the time and effort required to understand their utilization. Although many strategies are very basic in nature, some of the more advanced trades require dedicated study, precise setup, and level thinking. Costs : Generally, the commissions associated with executing option trading strategies are much higher than standard equity trading fees. This can be somewhat cost prohibitive for the average passive investor and even for an active trader, these costs can certainly eat into profits. Liquidity issues : With some options which are thinly traded, such as those which are well out of the money due to strike price and exercise date, liquidity can be a major issue. Unlimited risk : There are a number of option trading strategies which carry with them unlimited downside risk potential. One such trade is writing uncovered options and any of these strategies should only be executed by a skilled and seasoned trader.

Introduction of Option:

Introduction of Option What is Option ? Types of Option ? Important Terminology of option How one can benefit from option? What is option Strategy ? How to use option strategy for trading?

STRATEGY 1 : LONG CALL:

STRATEGY 1 : LONG CALL Note : feel Bullish bought Naked option to gain from bull run Cost or Maximum Loss Unlimited Profit

STRATEGY 1 : LONG CALL:

STRATEGY 1 : LONG CALL When to Use: Investor is very bullish on the stock / index. Risk: Limited to the Premium . ( Maximum loss if market expires at or below the option strikeprice ). Reward: Unlimited Breakeven: Strike Price + Premium

STRATEGY 2 : SHORT PUT:

STRATEGY 2 : SHORT PUT Note : feel Bullish – Sell Put to gain from bull run Limited Unlimited Loss

STRATEGY 2 : SHORT PUT:

STRATEGY 2 : SHORT PUT When to Use: Investor is very Bullish on the stock / index. The main idea is to make a short term income. Risk: Put Strike Price – Put Premium. Reward: Limited to the amount of Premium received . Breakeven: Put Strike Price - Premium

STRATEGY : SHORT CALL:

STRATEGY : SHORT CALL Note : feel Very Bearish – Sell Call to gain from Bearish Limited Profit Unlimited Loss

STRATEGY : SHORT CALL:

STRATEGY : SHORT CALL When to use: Investor is very aggressive and he is very bearish about the stock / index . Risk: Unlimited Reward: Limited to the amount of premium Break-even Point: Strike Price + Premium

STRATEGY : SHORT CALL:

STRATEGY : SHORT CALL Note : feel Very Bearish – Sell Call to gain from Bearish Limited Profit Unlimited Loss

STRATEGY : SHORT CALL:

STRATEGY : SHORT CALL Note : feel Very Bearish – Sell Call to gain from Bearish Limited Profit Unlimited Loss

STRATEGY : SYNTHETIC LONG CALL: BUY STOCK, BUY PUT:

STRATEGY : SYNTHETIC LONG CALL: BUY STOCK , BUY PUT Note : feel Bullish – Buy stock Hedge with Put to Minimize RISK Limited Loss Unlimited Profit

STRATEGY : SYNTHETIC LONG CALL: BUY STOCK, BUY PUT:

STRATEGY : SYNTHETIC LONG CALL: BUY STOCK, BUY PUT When to use: When ownership is desired of stock yet investor is concerned about near-term downside risk. The outlook is conservatively bullish. Risk: Losses limited to Stock price + Put Premium – Put Strike price Reward: Profit potential is unlimited . Break-even Point: Put Strike Price + Put Premium + Stock Price – Put Strike Price

STRATEGY : LONG PUT:

STRATEGY : LONG PUT Unlimited Profit Limited Loss Note : feel Bearish – Buy Put earn profit

STRATEGY : LONG PUT:

STRATEGY : LONG PUT When to use: Investor is bearish about the stock /index . Risk: Limited to the amount of Premium paid . (Maximum loss if stock / index expires at or above the option strike price). Reward: Unlimited Break-even Point: Stock Price - Premium

STRATEGY : COVERED CALL:

STRATEGY : COVERED CALL Note : Feel Short Term Neutral Market – Buy stock earn gain selling call

STRATEGY : COVERED CALL:

STRATEGY : COVERED CALL When to use Short term neutral and moderate bullish Risk Stock Price Paid – Premium Received Reward – Limited Call Strike Price-stock Price Paid + premium received Break Even Stock Price Paid- Premium Received

LONG COMBO : SELL A PUT, BUY A CALL:

LONG COMBO : SELL A PUT, BUY A CALL

LONG COMBO : SELL A PUT, BUY A CALL:

LONG COMBO : SELL A PUT, BUY A CALL When to Use : Investor is Bullish on the stock. Risk: Unlimited (Lower Strike + net debit) Reward: Unlimited Breakeven : Higher strike + net debit

PROTECTIVE CALL / SYNTHETIC LONG PUT:

PROTECTIVE CALL / SYNTHETIC LONG PUT

PROTECTIVE CALL / SYNTHETIC LONG PUT:

PROTECTIVE CALL / SYNTHETIC LONG PUT When to Use: If the investor is of the view that the markets will go down (bearish) but wants to protect against any unexpected rise in the price of the stock. Risk: Limited . Maximum Risk is Call Strike Price – Stock Price + Premium Reward: Maximum is Stock Price – Call Premium Breakeven: Stock Price – Call Premium

COVERED PUT:

COVERED PUT

COVERED PUT:

COVERED PUT When to Use : If the investor is of the view that the markets are moderately bearish . Risk: Unlimited if the price of the stock rises substantially Reward: Maximum is (Sale Price of the Stock – Strike Price) + Put Premium Breakeven: Sale Price of Stock + Put Premium

LONG STRADDLE:

LONG STRADDLE

LONG STRADDLE:

LONG STRADDLE When to Use: The investor thinks that the underlying stock / index will experience significant volatility in the near term. Risk: Limited to the initial premium paid . Reward : Unlimited Breakeven: Upper Breakeven Point = Strike Price of Long Call + Net Premium Paid Lower Breakeven Point = Strike Price of Long Put - Net Premium Paid

SHORT STRADDLE:

SHORT STRADDLE

SHORT STRADDLE:

SHORT STRADDLE When to Use: The investor thinks that the underlying stock / index will experience very little volatility in the near term. Risk: Unlimited Reward: Limited to the premium received Breakeven: Upper Breakeven Point = Strike Price of Short Call + Net Premium Received Lower Breakeven Point = Strike Price of Short Put - Net Premium Received

LONG STRANGLE:

LONG STRANGLE

LONG STRANGLE:

LONG STRANGLE When to Use: The investor thinks that the underlying stock / index will experience very high levels of volatility in the near term. Risk: Limited to the initial premium paid Reward: Unlimited Breakeven: Upper Breakeven Point = Strike Price of Long Call + Net Premium Paid Lower Breakeven Point = Strike Price of Long Put - Net Premium

SHORT STRANGLE:

SHORT STRANGLE

SHORT STRANGLE:

SHORT STRANGLE When to Use: This options trading strategy is taken when the options investor thinks that the underlying stock will experience little volatility in the near term. Risk: Unlimited Reward: Limited to the premium received Breakeven: Upper Breakeven Point = Strike Price of Short Call + Net Premium Received Lower Breakeven Point = Strike Price of Short Put - Net Premium Received

COLLAR:

COLLAR

COLLAR:

COLLAR When to Use: The collar is a good strategy to use if the investor is writing covered calls to earn premiums but wishes to protect himself from an unexpected sharp drop in the price of the underlying security . Risk: Limited Reward: Limited Breakeven: Purchase Price of Underlying – Call Premium + Put Premium

BULL CALL SPREAD STRATEGY: BUY CALL OPTION, SELL CALL OPTION:

BULL CALL SPREAD STRATEGY: BUY CALL OPTION, SELL CALL OPTION

BULL CALL SPREAD STRATEGY: BUY CALL OPTION, SELL CALL OPTION:

BULL CALL SPREAD STRATEGY: BUY CALL OPTION, SELL CALL OPTION When to Use: Investor is moderately bullish. Risk: Limited to any initial premium paid in establishing the position. Maximum loss occurs where the underlying falls to the level of the lower strike or below. Reward: Limited to the difference between the two strikes minus net Premium cost . Maximum profit occurs where the underlying rises to the level of the higher strike or above Break-Even-Point (BEP ): Strike Price of Purchased call+ Net Debit Paid

BULL PUT SPREAD STRATEGY: SELL PUT OPTION, BUY PUT OPTION:

BULL PUT SPREAD STRATEGY: SELL PUT OPTION, BUY PUT OPTION

BULL PUT SPREAD STRATEGY: SELL PUT OPTION, BUY PUT OPTION:

BULL PUT SPREAD STRATEGY: SELL PUT OPTION, BUY PUT OPTION When to Use: When the investor is moderately bullish . Risk: Limited. Maximum loss occurs where the underlying falls to the level of the lower strike or below Reward: Limited to the net premium credit. Maximum profit occurs where underlying rises to the level of the higher strike or above . Breakeven: Strike Price of Short Put - Net Premium Received

BEAR CALL SPREAD STRATEGY: SELL ITM CALL, BUY OTM CALL:

BEAR CALL SPREAD STRATEGY: SELL ITM CALL, BUY OTM CALL

BEAR CALL SPREAD STRATEGY: SELL ITM CALL, BUY OTM CALL:

BEAR CALL SPREAD STRATEGY: SELL ITM CALL, BUY OTM CALL When to use: When the investor is mildly bearish on market. Risk: Limited to the difference between the two strikes minus the net premium . Reward: Limited to the net premium received for the position i.e ., premium received for the short call minus the premium paid for the long call. Break Even Point: Lower Strike + Net credit

BEAR PUT SPREAD STRATEGY: BUY PUT, SELL PUT:

BEAR PUT SPREAD STRATEGY: BUY PUT, SELL PUT

BEAR PUT SPREAD STRATEGY: BUY PUT, SELL PUT:

BEAR PUT SPREAD STRATEGY: BUY PUT, SELL PUT When to use: When you are moderately bearish on market direction Risk: Limited to the net amount paid for the spread . i.e . the premium paid for long position less premium received for short position . Reward: Limited to the difference between the two strike prices minus the net premium paid for the position . Break Even Point: Strike Price of Long Put – Net Premium Paid

LONG CALL BUTTERFLY::

LONG CALL BUTTERFLY : SELL 2 ATM CALL OPTIONS, BUY 1 ITM CALL OPTION AND BUY 1 OTM CALL OPTION When to use: When the investor is neutral on market direction and bearish on volatility . Risk Net debit paid. Reward Difference between adjacent strikes minus net debit Break Even Point : Upper Breakeven Point = Strike Price of Higher Strike Long Call – Net Premium Paid Lower Breakeven Point = Strike Price of Lower Strike Long Call + Net Premium Paid

SHORT CALL BUTTERFLY:

SHORT CALL BUTTERFLY BUY 2 ATM CALL OPTIONS, SELL 1 ITM CALL OPTION AND SELL 1 OTM CALL OPTION . When to use: You are neutral on market direction and bullish on volatility . Neutral means that you expect the market to move in either direction - i.e . bullish and bearish. Risk Limited to the net difference between the adjacent strikes (Rs. 100 in this example) less the premium received for the position . Reward Limited to the net premium received for the option spread. Break Even Point: Upper Breakeven Point = Strike Price of Highest Strike Short Call - Net Premium Received Lower Breakeven Point =Strike Price of Lowest Strike Short Call + Net premium Received

LONG CALL CONDOR:

LONG CALL CONDOR BUY 1 ITM CALL OPTION (LOWER STRIKE), SELL 1 ITM CALLOPTION (LOWER MIDDLE), SELL 1 OTM CALL OPTION (HIGHER MIDDLE), BUY 1 OTM CALL OPTION (HIGHER STRIKE ) When to Use: When an investor believes that the underlying market will trade in a range with low volatility until the options expire . Risk Limited to the minimum of the difference between the lower strike call spread less the higher call spread less the total premium paid for the condor . Reward Limited. The maximum profit of a long condor will be realizedwhen the stock is trading between the two middle strike prices. Break Even Point: Upper Breakeven Point =Highest Strike – Net Debit Lower Breakeven Point =Lowest Strike + Net Debit

SHORT CALL CONDOR:

SHORT CALL CONDOR SHORT 1 ITM CALL OPTION (LOWER STRIKE), LONG 1 ITM CALL OPTION (LOWER MIDDLE), LONG 1 OTM CALLOPTION (HIGHER MIDDLE), SHORT 1 OTM CALL OPTION (HIGHER STRIKE ). When to Use: When an investor believes that the underlying market will break out of a trading range but is not sure in which direction. Risk Limited . The maximum loss of a short condor occurs at the center of the optionspread . Reward Limited . The maximum profit of a short condor occurs when the underlying stock / index is trading past the upper or lower strike prices. Break Even Point: Upper Break even Point = Highest Strike – Net Credit Lower Break Even Point = Lowest Strike + Net Credit

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