The derivative segment of the Indian financial markets is one of the most preferred segments by the investors due to a number of reasons. Derivatives are special type of contracts, whose values are derived from that of an underlying security or asset.
Futures and Options are the two standardized derivative instruments which are traded in India. Options allow the investor to buy or sell a given security or asset over a set period of time at a pre-determined price. The underlying security can be a stock or commodity or even an index. Options are preferred by investors because the investor need to pay only a small amount known as premium to trade in options.
Options are complicated compared to conventional stocks and require extensive research and knowledge. There are various strategies which when implemented correctly can help you to trade effectively in options. These strategies are legal and can easily be used by beginners.
Let us take at some of the major option trading strategies and find out the perfect one for all your option trading needs.
Table of Content
List of Options Trading Strategies
Long Call Options
This strategy requires buying calls and is preferred for investors who are confident enough about the prices of the underlying stock or asset class. This strategy helps you in making the most out of the rising prices of the underlying asset. This strategy also minimizes the overall risk when you trade in options. When you trade with this strategy, you are only risking your premium amount but on the other hand, the potential profit can be unlimited based on the rally in the underlying asset.
Long Put Options
This strategy requires you to buy Put Options and is very much similar to the Long Call strategy. The only difference is that in this case there should be a decline in the price of the underlying security or asset. In case, the value of asset rises beyond the strike price, your risk will be limited to the amount of premium paid by you. Long Put strategy is often used by investors to take advantage of falling stock prices.
Short Put Options
This strategy is recommended for investors who are option sellers. Short put strategy aims to extract profits from the premiums paid by other investors. For example, if an option seller sells an option to an investor and the price of the underlying asset increases or remains same, the investor will probably let the contract expire. In this case, using the Short Put strategy, the option seller will be entitled to retain the premium amount, thus earning profit from the trade.
Covered Call Options
This strategy is widely used by investors who want to generate income from a stock they own and the prices of the same are not showing any significant movement. In this strategy, the investors own a particular stock and sell a call option with that stock as the underlying asset. As a result, you will receive a premium. In such a case, if the prices don’t show any moment and remain stagnant, the option buyer will obviously let the contract expire. After the expiry, you will be entitled to retain the premium amount and earn profit from the transaction.
Married Put Options
This strategy requires the use of both the segments of derivatives market, namely futures and options. The investor invests simultaneously in stocks and options and buys a put option contract for every few shares bought. The put option will safeguard the investment in stocks in case of a loss in share value. The aim of this strategy is to insure your investment against losses in share value. This strategy is a bit complicated, but when it is implemented correctly, it helps in offsetting portfolio losses while waiting for share prices to increase.
Protective Put Options
As the name suggests, this strategy is recommended for investors who want to protect themselves from losses. In this strategy, you need to buy a long-put option against an asset which you already own. This will; provide you protection if the price if the asset decreases with time. This is very much similar to the married put strategy, the only difference being that protective put is used to minimize losses from the asset which you already own, whereas married put protects the asset which you buy at the same time.
Conclusion
Trading in Options is very lucrative because the losses are limited to the value of the premium whereas there is no limit for profits. However, it must be noted that they are more complicated compared to conventional stock trading and require extensive research and knowledge. If you are new to the market, Prime Delta Derivative can help you by providing research-based recommendations for all your trades.
Happy Investing!
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