Options Trading Strategies for the Indian Market
The trade in Options in India began in 2001 with the introduction of Index Options trade by the National Stock Exchange of India, the country's premier stock exchange. The trade started showing growth in liquidity from 2006. Since then, the trade in Options has come to represent one of the most significant segments of Derivatives trade in the country. Such trade is complex and requires the use of market strategies by investors to conduct them effectively. Trading strategies for Options can be categorised based on whether the investors predict a rise or fall in stock prices or whether they predict volatility in an underlying asset's price.
Bullish strategies are employed by traders when they predict the rise in the price of stocks for an underlying asset. Bullish strategy can be broadly categorised into the following:
- The long call is the practice of buying Call Options. This strategy presents opportunities for very high profit to the buyer. The long call strategy is subject only to premium risks.
- A short put is a practice of selling Put Options. In this strategy, the trader attempts to profit from the increase of the underlying asset's price.
- Bull call spread refers to buying Call Options with lower strike prices and selling ones with higher strike prices simultaneously.
- Bull put spread to the strategy of selling Put Options with higher strike prices and buying ones with lower strike prices simultaneously.
- The bull ratio spread is the strategy of buying and selling Call Options with the same expiration date.
Bearish strategies are employed by traders when they predict the fall of price for an underlying asset's stocks. Bearish strategies can broadly be categorised into the following:
- Long put is the practice of buying Put Options. Traders do that to profit from the fall in the market price of underlying assets. In that situation, an increase in the implied volatility of the assets helps too.
- Bearish put spreads are buying Put Options with higher strike prices and selling Put Options with lower strike prices simultaneously.
- Short call refers to selling Call Options which the trader believes will see a price decrease.
- Bear call spreads refer to the strategy of selling Call Options with lower strike prices and buying ones with higher strike prices simultaneously.
- Covered put strategy refers to the practice of selling and buying Put Options with the same underlying assets.
- A synthetic short call is a practice of selling Call Options and buying Put Options simultaneously for the same price.
Neutral strategies are also called non-directional strategies. These are used when traders are not sure of the rise or fall of price for Options. These can be broadly categorised into the following:
- A butterfly is a practice of combining bull spreads with bear put spreads.
- Straddle is the practice of buying and selling options with the same strike price.
- Strangle refers to the strategy of buying Options with higher strike prices and selling Put Options with lower strike prices, with the profit being derived when the price of stocks deviates from both.
- The collar is the practice of buying the underlying asset and, at the same time, buying Put Options with lower prices and selling Call Options with higher prices of the same asset.
The number and complexity of strategies available to Options traders are varied and require an in-depth knowledge of finance. Such complexity means that most trade is handled by investment advisors who help you meet your investment goals.
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