option trading strategies top 18 strategies every investor should know

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One thing I’ve seen in all the conversations I’ve had with options traders, both seasoned and new, is that most view trading options as a hit-or-miss proposition.

When one begins an options trade, there is usually a sense of amusement, yet, many people are unaware of how detrimental this can be.

There are close to 475 option strategies, but in this chapter, we will discuss only some strategies you should know to understand the markets or stocks and map them with the right option strategy. 

Here are the strategies that we will discuss: 

Bullish strategies:

  1.   Bull Call Spread 
  2.   Bull Put Spread 
  3.   Call Ratio Back Spread
  4.   Bear Call 
  5.   Ladder Call 
  6.   Butterfly Synthetic Call 
  7.   Straps

 

Bearish Spreads

  1.   Bear Call Spread 
  2.   Bear Put Spread 
  3.   Bull Put Ladder 
  4.   Put Ratio Back spread 
  5.   Strip 
  6.   Synthetic Put

Neutral Strategies

  1.   Long & Short Straddles 
  2.   Long & Short Strangles
  3.   Long & Short Iron Condor 
  4.   Long & Short Butterfly 
  5.   Box

 

Along with the above points, we will also discuss Max Pain for option writing, i.e. some key observations and practical aspects, and Volatility Arbitrage employing Dynamic Delta hedging. 

One options strategy will be covered in each chapter so there is clarity and understanding over the strategy. This indicates that this module will consist of around 20 chapters. However, each chapter will be brief. I’ll go over each strategy’s history, execution, payoff, breakeven point, and potentially the best strikes to make. 

Please bear in mind that while I will describe all of these methods using the Nifty Index as a benchmark, you can apply the same principles to any stock option.

The most crucial thing I want you to know is that this module cannot be considered as a Holy Grail. Nothing in the markets, including none of the tactics we discuss in this module, is a guaranteed way to make money. This lesson aims to examine a few straightforward but crucial tactics that, when used properly, can generate income. 

Consider it this way: if you drive your car safely and well, you can utilise it to commute and ensure your family’s comfort. However, if you drive rashly, it could be dangerous for both you and anyone around you.

Similarly, these tactics generate income when used properly, if not, they might damage your P&L (Profit & Loss). I am responsible for ensuring you comprehend these techniques (help you learn how to drive a car). I will also explain the ideal circumstances in which you should apply these techniques. 

But you have the power to make it work for you; this depends on your discipline and how much you understand the market. Having said that, I feel that as you spend more ‘quality’ time in the markets, your application of methods will improve.

Let’s now get started! 

Technical Analysis, what is it?
Consider this analogy. Imagine you are vacationing in a foreign country where everything, including the language, culture, weather, and food, is new to you. On day 1, you do the regular touristy activities, and by evening you are starving and craving food. You want to end your day by having a great dinner. You ask around for a good restaurant, and you are told about a vibrant food street close by. You decide to give it a try. To your surprise, the food street has 100s of vendors selling different varieties of food. Everything looks different and interesting. You are clueless as to what to eat for dinner. To add to your dilemma, you cannot ask around as you do not know the local language. So given all this, how will you decide on what to eat?
Setting expectations
Market participants often approach technical analysis as a quick and easy way to profit. On the contrary, technical analysis is anything but quick and easy. If done right, consistently generating profits is possible, but to get to that stage, one must put in the required effort to learn the technique. A trading catastrophe is bound to happen if you approach TA as a quick and easy way to make money in markets. When a trading debacle happens, more often than not, the blame is on technical analysis and not on the trader’s inability to efficiently apply Technical Analysis. Hence before you start delving deeper into technical analysis, it is important to set expectations on what can and cannot be achieved with technical analysis.
1. Trades – TA is best used to identify short-term trades. Do not use TA to identify long-term investment opportunities. Long-term investment opportunities are best identified using fundamental analysis. Also, If you are a fundamental analyst, use TA to calibrate the entry and exit points.
2. Return per trade – TA – based trades are usually short-term in nature. Do not expect huge returns within a short duration of time. The right way to use TA is to identify frequent short-term trading opportunities that can give you small but consistent profits.
3. Holding Period – Trades based on technical analysis can last between a few minutes to a few weeks, usually not beyond that. We will explore this aspect when we discuss the topic of timeframes.
4. Holding Period – Trades based on technical analysis can last between a few minutes to a few weeks, usually not beyond that. We will explore this aspect when we discuss the topic of timeframes.
5. Risk ­– Often, traders initiate a trade for a certain reason; however, in case of an adverse movement in the stock, the trade starts to lose money. Usually, in such situations, traders hold on to their loss-making trade with the hope they can recover the loss. Remember, TA-based trades are short-term; if the trade goes bad, do remember to cut the losses and move on to identify the next opportunity.
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