Best option trading method
It also gives you the flexibility to select risk to reward ratio by choosing the strike price of the options contract you buy. A call option contract with a strike price of Rs. If you expect that the price of ABC Ltd will rise significantly in the coming weeks, and you paid Rs. As each option contract covers 75 shares, the total amount you will receive is Rs. Since you had paid Rs.
For the ease of understanding, we did not take into account commission charges. Long call strategy limits the downside risk to the premium paid which is coming around Rs. A short put is the opposite of buy put option. With this option trading strategy, you are obliged to buy the underlying security at a fixed price in the future. This option trading strategy has a low profit potential if the stock trades above the strike price and exposed to high risk if stock goes down. It is also helpful when you expect implied volatility to fall, that will decrease the price of the option you sold.
A short put is best used when you expect the underlying asset to rise moderately. It would still benefit if the underlying asset remains at the same level, because the time decay factor will always be in your favour as the time value of put will reduce over a period of time as you reach near to expiry.
This is a good option trading strategy to use because it gives you upfront credit, which will help to somewhat offset the margin. Suppose Nifty is trading at Rs. A put option contract with a strike price of is trading at Rs. If you expect that the price of Nifty will surge in the coming weeks, so you will sell strike and receive upfront profit of Rs. This transaction will result in net credit because you will receive the money in your broking account for writing the put option.
This will be the maximum amount that you will gain if the option expires worthless. If the market moves against you, then you should have a stop loss based on your risk appetite to avoid unlimited loss. So, as expected, if Nifty Increases to or higher by expiration, the options will be out of the money at expiration and therefore expire worthless. You will not have any further liability and amount of Rs.
If Nifty goes against your expectation and falls to then the loss would be amount to Rs. Following is the payoff schedule assuming different scenarios of expiry. For the ease of understanding, we did not take into account commission charges and Margin. A short put options trading strategy can help in generating regular income in a rising or sideways market but it does carry significant risk and it is not suitable for beginner traders.
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A Bull Put Spread involves one short put with higher strike price and one long put with lower strike price of the same expiration date. A Bull Put Spread is initiated with flat to positive view in the underlying assets.
Bull Put Spread Option strategy is used when the option trader believes that the underlying assets will rise moderately or hold steady in the near term. It consists of two put options — short and long put. Strike price can be customized as per the convenience of the trader. If Mr. A believes that price will rise above or hold steady on or before the expiry, so he enters Bull Put Spread by selling Put strike price at Rs. The net premium received to initiate this trade is Rs. Maximum profit from the above example would be Rs.
It would only occur when the underlying assets expires at or above In this case, both long and short put options expire worthless and you can keep the net upfront credit received that is Rs. Maximum loss would also be limited if it breaches breakeven point on downside. However, loss would be limited to Rs. For the ease of understanding, we did not take in to account commission charges. Following is the payoff chart and payoff schedule assuming different scenarios of expiry.
Delta: Delta estimates how much the option price will change as the stock price changes. The net Delta of Bull Put Spread would be positive, which indicates any downside movement would result in loss.
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Vega: Bull Put Spread has a negative Vega. Therefore, one should initiate this strategy when the volatility is high and is expected to fall. Gamma: This strategy will have a short Gamma position, so any downside movement in the underline asset will have a negative impact on the strategy. A Bull Put Spread Options strategy is limited-risk, limited-reward strategy.
This strategy is best to use when an investor has neutral to Bullish view on the underlying assets. The key benefit of this strategy is the probability of making money is higher as compared to Bull Call Spread. A Long Call Ladder is the extension of bull call spread; the only difference is of an additional higher strike sold. The purpose of selling the additional strike is to reduce the cost. It is limited profit and unlimited risk strategy. It is implemented when the investor is expecting upside movement in the underlying assets till the higher strike sold.
The motive behind initiating this strategy is to rightly predict the stock price till expiration and gain from time value. A Long Call Ladder spread should be initiated when you are moderately bullish on the underlying assets and if it expires in the range of strike price sold then you can earn from time value factor. Also another instance is when the implied volatility of the underlying assets increases unexpectedly and you expect volatility to come down then you can apply Long Call Ladder strategy.
Strike price can be customized as per the convenience of the trader i. Suppose Nifty is trading at An investor Mr. A thinks that Nifty will expire in the range of and strikes, so he enters a Long Call Ladder by buying call strike price at Rs. The net premium paid to initiate this trade is Rs. It would only occur when the underlying assets expires in the range of strikes sold. Maximum loss would be unlimited if it breaks higher breakeven point. However, loss would be limited up to Rs.
Delta: At the time of initiating this strategy, we will have a short Delta position, which indicates any significant upside movement, will lead to unlimited loss. Vega: Long Call Ladder has a negative Vega. Therefore, one should buy Long Call Ladder spread when the volatility is high and expects it to decline.
Theta: A Long Call Ladder will benefit from Theta if it moves steadily and expires in the range of strikes sold. Gamma: This strategy will have a short Gamma position, which indicates any significant upside movement, will lead to unlimited loss. A Long Call Ladder is exposed to unlimited risk; it is advisable not to carry overnight positions.
Also, one should always strictly adhere to Stop Loss in order to restrict losses.
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A Long Call Ladder spread is best to use when you are confident that an underlying security will not move significantly and will stays in a range of strike price sold. Another scenario wherein this strategy can give profit is when there is a decrease in implied volatility. A covered call options trading strategy is an Income generating strategy which can be initiated by simultaneously purchasing a stock and selling a call option.
It can also be used by someone who is holding a stock and wants to earn income from that investment.
3 Profitable Option Trades
Generally, the call option which is sold will be out-the-money and it will not get exercised unless the stock price increases above the strike price. Choosing between strikes involves a trade-off between priorities. Trading bots use algorithms to determine the best time to trade with the least amount of risks. There are some of these programs on the market that have made traders consistent profits over the years, but there are just as many if not more stories of blown accounts when left to the wits of a software program. They are unreliable and inconsistent from one to another.
Get informed and educated in the signs and strategies instead.
There are many available options trading education companies and courses online that can teach you to develop your own personal trading strategy that works. The best options strategy might just be — your strategy. Ultimately, all that matters is if the dot falls above or below the line at the time your option closes. The best option strategies give you an edge to be right more than wrong with your market reads which in this game is what it takes to win. Caitlin Clark wins Dawn Staley Award.
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