Options Trading Strategies

List of Top 6 Options Trading Strategies

  1. Long Call Options Trading Strategy
  2. Short Call Options Trading Strategy
  3. Long Put Options Trading Strategy
  4. Short Put Options Trading Strategy
  5. Long Straddle Options Trading Strategy
  6. Short Straddle Options Trading Strategy

Let us discuss each of them in detail –

Options Trading Strategies

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Source: Options Trading Strategies (wallstreetmojo.com)

#1 Long Call Options Trading Strategy

Best time to Use: When you are very bullish on the stock or index.
Risk:Risk is limited to the Premium. (There is a maximum loss if the market expires at or below the option strike price).
Reward:Reward is Unlimited
Breakeven:(Strike Price + Premium)

Let us now understand through this example how to fetch the data from the website and how to determine the Payoff schedule for Long Call Strategy.

How to download Options Data?

Options Trading Strategies-1

Step 1: Visit the stock exchange website.

  1. Go to https://www.nseindia.com/.
  2. Select Equity DerivativesEquity DerivativesEquity Derivative is a class of derivatives whose value is connected to the price variations of the underlying asset & it is generally used for hedging risk or speculating moves in indexes. It has 4 major types, i.e., Forwards & Futures, Options, Warrants, & Swaps. read more
  3. In the Search box, put CNX Nifty
  4. The Current Nifty Index Price is given on the right-hand top corner. Note it down in your excel spreadsheet.
  5. Please note that in this example, we have taken NSE (National Stock Exchange, India). You may download a similar dataset for other international stock exchangesStock ExchangesStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more like NYSE, LSE, etc.

Step 2: Find the Option Premium

The next step is to find the Premium. For this, you will have to select some of the data according to your requirements.

Options Trading Strategies-2So In the case of the Long Put options trading strategy, we will select the following data.

  • Instrument Type: Index Options
  • Symbol: NIFTY
  • Expiry Date: Select the required expiry date.
  • Option Type: Call (For further examples, we will select Put, for a Put option)
  • Strike Price: Select the required Strike Price. In this case, I have selected 7600.
  • Once all the information is selected, you may click on Get Data. The premium price will be displayed then, which you will require for further calculations.

Step 3: Populate the data set in Excel Spreadsheet.

Once you have got the Current Nifty Index Price and the Premium data, you can proceed further to calculate your Input-output data as follows in an Excel Spreadsheet.

Options Trading Strategies 3

Breakeven Point= Strike PriceStrike PriceExercise price or strike price refers to the price at which the underlying stock is purchased or sold by the persons trading in the options of calls & puts available in the derivative trading. Thus, the exercise price is a term used in the derivative market.read more + Premium

Step 4: Create the Payoff Schedule

Next, we come to the Payoff schedule. This basically tells you how much profit you will make or how much you will lose at a specific Nifty index. Note that in case of options, you are not obliged to exercise them, and hence you are able to limit your loss to the amount of Premium paid.

The Spreadsheet shows the following information:

  • The various Closing price of Nifty
  • The Net payoff from this call option.

The formula used in this case is the IF function of excel. This is how the formula works:

  • If the Nifty closing price is less than the Strike price, we will not exercise the option. Thus, in this case, you only lose the amount of Premium paid (220).
  • At and above the breakeven point, you will start making a profit. So, in this case, the Nifty closing price is more than the Strike Price, and the profit that you make is calculated as = (Nifty closing Price-Strike Price-Premium).

You can check the formula used in the image above, in case you want to use it in your Spreadsheet.

Please note that for each strategy, we will include input data and output data. Input data is your strike price, Current Nifty index, Premium, and Break-even point. Output data will include the payoff schedule. This generally will give you a clear picture of how much you will make or lose at different Nifty Closing prices.

Strategy: Buy call Option Trading Strategy

 Current Nifty Index7655.05
Call OptionStrike Price (Rs.)7600
 Premium (Rs.)220
 Break-Even Point (Rs.) = (Strike price + Premium)7820

The Payoff Schedule of this Options Trading Strategy

On expiry, Nifty Closes atThe net payoff from call option (Rs.)
7300-220
7400-220
7500-220.00
7600-220.00
78200
8000180
8100280
Long Call Strategy

Long Call Strategy Analysis

  • It limits the downside risk to the extent of the Premium that you pay.
  • But if there is a rise in Nifty, then the potential return is unlimited.
  • This is one of the option trading strategies that will offer you the simplest way to benefit.

And that is why it is the most common choice among first-time investors in Options.

#2 Short Call Options Trading Strategy

  • In the options trading strategy that we discussed above, we were hoping that the stock would rise in the future, and hence we adopted a strategy of long Call there.
  • But the strategy of a short call is the opposite of that. When you expect the underlying stock to fall, you adopt this strategy.
  • An investor can sell Call options when he is very bearish about a stock/index and expects the prices to fall.
  • This is a position that offers limited profit potential. An Investor can incur large losses if the underlying price starts increasing instead of decreasing.
  • Though this strategy is easy to execute, it can be quite risky since the seller of the Call is exposed to unlimited risk.
Best time to Use: When you are very bearish on the stock or index.
Risk:The risk here becomes Unlimited.
Reward:The reward is limited to the amount of Premium
Breakeven:Strike Price+ Premium

Short Call Strategy Example

  • Matt is bearish about Nifty and expects it to fall.
  • Matt sells a Call option with a strike price of Rs. 7600 at a premium of Rs. 220, when the current Nifty is at 1.
  • If the Nifty stays at 7600 or below, the Call option will not be exercised by the buyer of the Call, and Matt can retain the entire Premium of Rs.220. 

Short Call Strategy Inputs

Strategy: Sell call Option Trading Strategy

 Current Nifty Index7655.1
Call OptionStrike Price (Rs.)7600
 Premium (Rs.)220
 Break-Even Point (Rs.) = (Strike price + Premium)7820

 Short Call Strategy Outputs

The Payoff Schedule of this Options Trading Strategy

On expiry, Nifty Closes atThe net payoff from call option (Rs.)
7300220
7400220
7500220
7600220
78200
8000-180
8100-280
Short Call Strategy

Short Call Strategy Analysis

  • Use this strategy when you have a strong expectation that the price will certainly fall in the future.
  • This is a risky strategy. As the stock prices rise, the short Call loses money more quickly.
  • This strategy is also called Short Naked Call since the investor does not own the underlying stock that he is shorting.

#3 Put Options Trading Strategy

Best time to Use: When the investor is bearish about the stock /index.
Risk:Risk is limited to the amount of Premium paid.
Reward:Unlimited
Breakeven:(Strike Price – Premium)

Long Put Strategy Example

  • Jacob is bearish on Nifty on 6th September, when the Nifty is at 1.
  • He buys a Put option with a strike price Rs. 7600 at a premium of Rs. 50, expiring on 24th
  • If Nifty goes below 7550 (7600-50), Jacob will make a profit on exercising the option.
  • In case the Nifty rises above 7600, he can give up the option (it will expire worthlessly) with a maximum loss of the Premium.

Long Put Strategy Input

Strategy: Buy Put Option Trading Strategy

 Current Nifty Index7655.1
Put OptionStrike Price (Rs.)7600
 Premium (Rs.)50
 Break-Even Point (Rs.) = (Strike price – premium)7550

Long Put Strategy Output

The Payoff Schedule of this Options Trading Strategy

On expiry, Nifty Closes atThe net payoff from call option (Rs.)
7200350
7300250
7400150
750050
75500
7600-50
7700-50
Long Put Strategy

Long Put Strategy Analysis

  • If you are bearish, you can profit from the declining stock prices by buying Puts. You will be able to limit your risk to the amount of Premium paid, but your profit potential remains unlimited.

This is one of the widely used options trading strategies when an investor is bearish.

#4 Short Put Options Trading Strategy

Best time to Use: When the investor is very bullish on the stock or the index.
Risk:Put Strike Price –Put Premium.
Reward:It is limited to the amount of Premium.
Breakeven:(Strike Price – Premium)

Short Put Strategy Example

  • Richard is bullish on Nifty when it is at 7703.6.
  • Richard sells a Put option with a strike price of Rs. 7600 at a premium of Rs. 50, expiring on 24th
  • If the Nifty index stays above 7600, he will gain the amount of Premium as the Put buyer won’t exercise his option.
  • In case the Nifty falls below 7600, Put buyer will exercise the option, and Richard will start losing money.
  • If the Nifty falls below 7550, which is the breakeven point, Richard will lose the Premium and more depending on the extent of the fall in Nifty.

Short Put Strategy Input

Strategy: Sell Put Options Trading Strategy

 Current Nifty Index7703.6
Put OptionStrike Price (Rs.)7600
 Premium (Rs.)50
 Break-Even Point (Rs.) = (Strike price – premium)7550

Short Put Strategy Output 

The Payoff Schedule of this Options Trading Strategy

On expiry, Nifty Closes atThe net payoff from call option (Rs.)
7200-350
7300-250
7400-150
7500-50
75500
760050
770050
Short Put Strategy

Short Put Strategy Analysis

  • Selling Puts can lead to regular income, but it should be done carefully since the potential losses can be significant.
  • This strategy is an income-generating strategy.

#5 Long Straddle Options Trading Strategy

Best time to Use: When the investor thinks that the underlying stock/index will experience significant volatility in the near term.
Risk:It is limited to the initial Premium paid.
Reward:The reward here is Unlimited.
Breakeven:1.Upper Breakeven Point = Strike Price of Long Call + Net Premium Paid.
2.Lower Breakeven Point = Strike Price of Long Put – Net Premium Paid.

Long Straddle Strategy Example 

  • Harrison goes to the NSE website.
  • He fetches the data for the Current Nifty Index, Strike Price (Rs.), and Premium (Rs.).
  • He then selects the index derivative. In instrument type, Harrison selects index options. In symbol, he selects nifty, the expiry date is 24th September, option type will be called, and the Strike price is 7600.
  • Call Premium paid is RS 220. Now in option type, he selects Put, the Strike Price is the same as above i.e., So Put Premium paid is 50.

The data for our input table is as follows:

  • The current nifty index is 7655.05
  • The strike price is 7600
  • The total Premium paid is 220+50, which equals 270.
  • The Upper Breakeven point is calculated as 7600+270, which comes to 7870
  • The Lower Breakeven point is calculated as 7600-270, which comes to 7330
  • We will assume on expiry Nifty Closes as on expiry Nifty Closes at 6800, 6900, 7000, 7100, and so on.

Long Straddle Strategy Inputs

Strategy: Buy Put + Buy Call Options Trading Strategy

 Current Nifty Index7655.05
Call and Put OptionStrike Price (Rs.)7600
 Call Premium (Rs.)220
 Put Premium (Rs.)50
 Total Premium (Rs)270
 Break-Even Point (Rs.)7870
 Break-Even Point (Rs.)7330

Long Straddle Strategy Outputs

The Payoff Schedule of this Options Trading Strategy

On expiry, Nifty Closes atThe net payoff from Put Purchased (Rs.)The net payoff from Call Purchased (Rs.)Net Payoff (Rs.)
6800750-220530
6900650-220430
7000550-220330
7100450-220230
7200350-220130
7330220-2200
7400150-220-70
750050-220-170
7600-50-220-270
7652-50-168-218
7700-50-120-170
7870-50500
7900-508030
7983-50163113
8000-50180130
8100-50280230
8200-50380330
8300-50480430
Long Straddle Strategy

Long Straddle Strategy Analysis

  • If the price of the stock/index increases, the Call is exercised while the Put expires worthless, and if the price of the stock/index decreases, the Put is exercised, the Call expires worthless.
  • Either way, if the stock/index show volatility to cover the cost of the trade, profits are to be made.
  • If the stock /index lies between your upper and lowers breakeven point, you suffer losses to that extent.
  • With Straddles, the investor is direction neutral.
  • All that he is looking out for is the stock/index to break out exponentially in either direction.

#6 Short Straddle Options Trading Strategy

  • A Short Straddle is exactly the opposite of a Long Straddle.
  • An investor can adopt this strategy when he feels that the market will not show much movement. Thereby he sells a Call and a Put on the same stock/index for the same maturity and strike price.
  • It creates a net income for the investor. If the stock/index does not move much in either direction, the investor retains the Premium as neither the Call nor the Put will be exercised. 
Best time to Use: When the investor thinks that the underlying stock will experience very little volatility in the near term.
Risk:Unlimited
Reward:Limited to the Premium received
Breakeven:1.     Upper Breakeven Point = Strike Price of Short Call + Net Premium Received2.     Lower Breakeven Point = Strike Price of Short Put – Net Premium Received

 Short Straddle Strategy Example

  • Buffey goes to the NSE website and fetches the data for the Current Nifty Index, Strike Price (Rs.), and Premium (Rs.).
  • He then selects the index derivative. In instrument type, he selects index options. In symbol, he selects nifty, the expiry date is 24th September, option type will be called, and the Strike price is 7600.
  • Call Premium paid is RS 220. Now in, option type he selects Put, the Strike Price is the same as above i.e.
  • So Put Premium paid is 50.

Short Straddle Strategy Inputs

Strategy: Sell Put + Sell Call Options Trading Strategy

 Current Nifty Index7655
Call and Put OptionStrike Price (Rs.)7600
 Call Premium (Rs.)220
 Put Premium (Rs.)50
 Total Premium (Rs)270
 Break-Even Point (Rs.)7870
 Break-Even Point (Rs.)7330

Short Straddle Strategy Outputs

The Payoff Schedule of this Options Trading Strategy

On expiry, Nifty Closes atThe net payoff from Put Sold (Rs.)The net payoff from Call Sold (Rs.)Net Payoff (Rs.)
6800-750220-530
6900-650220-430
7000-550220-330
7100-450220-230
7200-350220-130
7330-2202200
7400-15022070
7500-50220170
760050220270
765250168218
770050120170
787050-500
790050-80-30
798350-163-113
800050-180-130
810050-280-230
820050-380-330
830050-480-430
830050-480-430
Short Straddle Strategy

Short Straddle Strategy Analysis

  • If the stock moves up or down significantly, the investor’s losses can be significant.
  • This is a risky strategy. It should be carefully adopted only when the expected volatility in the market is limited.

Conclusion

There are innumerable Options Trading Strategies available, but what will help you, in the long run, is “Being systematic and probability-minded.” No matter what strategy you use, it is essential that you have a good knowledge of the Market and your Goal.

The key here is to understand which of the options trading strategies suit you more.

So really, which of the options trading strategy suits you the most?

This has been a guide to Options Trading Strategies. Here we discuss the six important strategies – #1: Long Call Strategy, #2: Short Call Strategy, #3: Long Put Strategy, #4: Short Put Strategy, #5: Long Straddle Strategy, and #6: Short Straddle Strategy. You can learn more about derivatives and trading from the following articles –

Reader Interactions

Comments

  1. Diyan says

    Hi Dheeraj ,

    Thank you for detail information. As a student of finance I find it very helpful.

    in explanation of PUT’s strategies(#3 and #4) it is written that:
    Breakeven: (Stock Price – Premium)

    I think it should have been Strike price instead of Stock price.
    Am I wrong or this is just a technical mistake?

    • Dheeraj Vaidya says

      Many thanks Diyan for pointing out this mistake :-)
      I corrected the same in the post.
      Best,
      Dheeraj

  2. james afful says

    Very useful. Please can you share information on futures?

    • Dheeraj Vaidya says

      Hi James,

      thanks :-) will come with the same on Futures shortly.

      Best,
      Dheeraj

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