Have you just opened a demat account? Here are the simple option trading strategies:
- Long Call – When you buy a call option on an underlying asset, it is called having a “Long Call” strategy. For beginners, this can be a good way of option trading. Suppose you buy a call on a stock, which is trading at ₹100. The option’s exercise price is ₹100 and you pay ₹5 premium to buy it. Its expiration date is December 31. Let us say that the stock’s price rises to ₹120 by December 31. You can buy it at ₹100 and sell it at ₹120. By factoring in ₹5 premium, you will earn a profit of ₹15 (120 – 100 – 5). Your profit-earning potential is limitless because the more the stock price goes up, the more profit you will earn. However, if the price drops below a certain point, you will not exercise the option and you will only lose the option premium. Hence, your loss is capped.
- Covered Call – In this strategy, you buy an underlying stock and sell a call option on it. By selling a call option, you are giving the right to buy the stock from you to someone else, who will pay you a premium for it. If the stock’s market price is lesser than the option’s exercise price, the call holder will not exercise it and you will keep the option premium. If the stock’s market price is higher than the exercise price, you will keep the premium but you will be obligated to sell the stock at a lower than market price.
- Long Put – When you buy an option to sell an underlying asset at a predetermined price on or before an expiry date, it is called the “Long Put” strategy. If the market price of the underlying asset is lower than the option’s exercise price, you will exercise the option, thereby selling the asset at a higher than market price and make a profit. However, if the underlying asset’s price is higher than the option’s exercise price, there is no point in exercising the option and your loss will be capped to the option premium.
- Married Put – In this strategy, you first buy an asset. Then, you buy a put option on the same asset. Hence, you have the right to sell the asset (you own) at a predetermined price on or before the expiry date. If the market price of the underlying asset falls lower than the option’s exercise price, you can sell it at the exercise price, thereby earning a profit. However, if the asset’s market price is higher than the exercise price, you can sell the asset in the market (without exercising the option) and still earn a profit.
- Long Straddle – When you expect a stock’s price to either move up or down significantly but you are not sure of the direction in which it will move, you use the “Long Straddle” strategy. Here, you buy a call option and a put option on the same stock. You have to ensure that both the put and the call options have the same expiration date and the same strike price. If the price increases significantly, you can exercise the call option to earn a profit. If the price decreases considerably, you can use the put option to earn a profit. As you buy two options, you have to pay the option premium twice. However, you hope that the price will move up or down significantly so that you will earn a profit even after deducting the option premiums paid.
Conclusion
If you are about to begin your trading journey, you can open a free demat account or a regular demat account. Whichever account you have, you must learn beginner-friendly option trading strategies if you are keen to trade derivatives.
However, derivatives can be extremely volatile, which can make you incur huge losses. So, before trading in derivatives, you must learn how to reduce the risk of such trading so that you are on the safer side while buying or selling options.