- Vertical spreads – These These structures include two options for an underlying that have the same expiration. These You can create risk-defined strategies with either call or put options to trade bullish and bearish views.
- Bull Call Spread – As the name suggests, it’s a bullish strategy created with call options. In This is where you buy one call option, preferably ATM or ITM, and simultaneously sell an OTM strike options call option. The Trades make money when the underlying is up, and lose otherwise. In The following example shows industries trading at 2336. A slight ITM call option of strike 22320 is purchased and 2400 is traded. The The maximum risk is in the trade Debit Paid which in this example is 34.1 (51-16.9) Reliance lot size is 250 so the max risk is 34.1*250 or Rs. 8525. The Maximum profit potential is the difference in the 2 strikes distance and debit paid. In this instance, it is 80 – 34.1 / 45.9. Multiplying it by the lot size will give us maximum profit potential. Rs. 11,475
b. Bull Put spread – Again as the name suggests, it’s a bullish structure created with put options. HereA put option, which is preferred ATM/ITM, is sold. An option with a lower strike is also sold. For The same Reliance A 2340 put option can be sold, and 2260 puts can be purchased. This will give rise to the desired bull put spread structure. The The main differences between a bull-call spread and a Bull Put spread are the risk-reward ratio (POP) and the probability of profit. In A bull call spread will reduce your POP, but the reward is greater than the risk. In a bull put spread, you’d risk a bit more to get the extra cushion on the probability of the trade working in your favor of you.
- Bear Put Spread Bear Call Spread – Just Similar to the bullish options structure with call/put options that we saw, bearish options structures are also possible. So A bear spread is when you simultaneously buy and sell OTM options while buying an ATM/ITM option. And To sell an ATM/ITM Call option and simultaneously purchase an OTM Call Option, a bear call spread would be called.
- Vertical Spreads are effective in both high- and low-volatility market. Look Create credit spreads (bull call spread or bear put spread) during a high. Volatility Period and debit spreads, (bull call spread or Bear Put spread) during low volatility periods.
- Spreads should not be created too close to expiry (4-5 days to expiry for stock options) as the OTM options don’t have much value so risk reward might not be favorable.
- Target stop loss Spreads can be kept based both on the underlying spread and the spread. Look You can book spreads for between 30-50% and the theoretical maximum profit/loss.
2. Straddle – Straddle ATM calls and put options can be combined. Trading Straddles can be described as a strategy that is non-directional and focuses more upon the volatility. If You expect volatility to fall without any direction in the underlying. A short straddle can be made (selling ATM call, put option both). SimilarlyA long straddle can be used if volatility is expected to rise or there is a significant move in the underlying. Below The short straddle strategy is the best and most profitable. Reliance Industries Both 2340 call options and put options are available for sale Note The short straddle strategy is risky on both sides, so it is important that you limit your position size when trading short-straddles. If OTM options can also be purchased on both sides to reduce risk in this short straddle trade. The Iron fly is a new type of structure that can be created in this manner.
Short In a falling volatility environment, straddles work well. Long straddles would be more effective in a rising vol environment.
3. Strangles – Similar To straddles, strangles can be used as non-directional strategies, but it works with OTM options instead of ATM options. UsuallyStrangles are traded on the short-side, i.e. The expectation is for volatility to fall while the underlying will stay within the range. For Stock options, OTM options, and OTM options both decay faster than OTM when there’s more time for expiry. It is best to trade for 20-30 sessions and use short strangle. Note Just like a short straddle is a risky strategy, a short strangle can be used to take on unlimited risks for both of you. If As a hedge against risk, OTM options on the other side are purchased. It results in an strategy known as an iron condor. Below Here are the details of the strategy, as well as the payoffs.
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