Chapter: - 3
SINGLE LEG STRATEGY
LONG CALL:
Long Call option' is the most basic & simplest strategy. It is recommended or implemented when we
expect the underlying asset to show significant upside move i.e., this is a directional strategy where
we are bullish on the market direction. Buying a Call or Long Call is the same as future but capped
with downside risk and requires less margin for implementation.
LONG PUT:
Long Put option' is again the most basic & simplest strategy among all. It is recommended or
implemented when we expect the underlying asset to show significant downside move in near term
i.e., this is directional strategy where we are bearish on the market direction. Buying a Put or Long
Put is the same as the future but capped with upside risk and requires less margin for
implementation.
SHORT CALL:
Short Call option is a simple but risky strategy & hence qualified as an advanced strategy. Short Call
or Selling Call is recommended when the price of the underlying asset is expected to fall & the stock
is not expected to rise further or remain sideways. Generally, we expect the price to stay below the
sold strike price.
SHORT PUT:
Short Put option is a simple but risky strategy & hence qualified as an advanced strategy. Short Put
or Selling Put is recommended when the price of the underlying asset is expected to rise & the stock
is not expected to fall further and remain sideways. Generally, we expect the price to stay above the
sold strike price.
TWO LEG STRATEGY
VERTICLE DEBIT STRATEGY
BULL CALL SPREAD:
A Bull Call Spread is created when the underlying view on the market is bullish, but not extremely
bullish. Bull Call Spread option strategy is a net debit strategy with limited risk to limited reward,
that is executed by buying a call and selling a higher strike call to fund it and reduce the execution
cost, it should not be executed when we have extreme bullish bias and expect a run-away rally, as
profit is capped on the upside.
BULL PUT SPREAD:
A Bear Put Spread, also called Put Debit Spread, is created when the underlying view on the market
is bearish, but not extremely bearish. Bear Put Spread is a net debit strategy with limited risk to
limited reward. Bear Put Spread is a option trading strategy, that is executed by buying a put and
selling lower strike put to fund it and reduce the execution cost, it should not be executed when we
have extreme bearish bias and expect a sharp drop or plummeting underlying prices, as profit is
capped on the downside.
VERTICLE CREDIT STRATEGY:
BULL PUT SPREAD:
A Bull Put Spread option strategy, also known as a "short put spread," is a strategy that involves
selling a put option at a higher strike price and buying a put option at a lower strike price with the
same expiration date (Mostly ITM and ATM Respectively). This creates a spread where the maximum
potential profit is limited to the premium received from selling the higher strike price minus
premium paid for buying lower strike price, and the maximum potential loss is limited to the
difference between the strike prices minus the premium received.
This strategy is considered a bullish strategy because it profits when the price of the underlying price
increase. If the price of the underlying rises above the strike price of the short put option, both
options will expire worthless, and the investor will keep the premium received as profit. If the price
of the underlying security falls above the strike price of the long put option leg, the investor will lose
money, but the loss will be limited to the difference between the strike prices minus the premium
received.
BEAR CALL SPREAD:
A bear call spread option strategy, also known as a "short call spread," is a strategy that involves
selling a call option at a lower strike price and buying a call option at a higher strike price with the
same expiration date (Mostly ITM and ATM Respectively). This creates a spread where the maximum
potential profit is limited to the premium received from selling the lower strike price minus premium
paid for buying higher strike price, and the maximum potential loss is limited to the difference
between the strike prices minus the premium received.
This strategy is considered a bearish strategy because it profits when the price of the underlying
price decreases. If the price of the underlying falls below the strike price of the short call option,
both options will expire worthless, and the investor will keep the premium received as profit. If the
price of the underlying security rises above the strike price of the long call option, the investor will
lose money, but the loss will be limited to the difference between the strike prices
STRADDLE:
Long Straddle Option Strategy is just opposite Short Straddle and is a Volatility Strategy that aims to
make money wherein you do expect underlying to show any significant movement or expecting rise
in volatility, i.e. a large price swing. Long option Straddle strategy demands underlying to move
significantly i.e., this is non directional strategy. In other words, if the underlying shows a significant
move and closes above or below bought strike, usually ATM, then the strategy will gain significantly.
STRANGLE:
Long Strangle option strategy, like long Straddle is a Volatility Strategy that aims to make money by a
swing, either ways, from a stock/index soaring up or plummeting down. Long Strangle option
strategy demands underlying to move significantly up i.e., this is non-directional, but volatility-based
strategy. In other words, if the underlying fails to show a significant move, option trader will lose
value in this as, both the option will expire worthless.