Futures and Options (FnO) trading has become one of the most popular ways to generate profits in the stock market. It can help you accumulate wealth quickly with limited capital if done correctly. However, with great potential comes great risk. No matter how experienced the trader is, even one small mistake can wipe out the entire investment.
Thankfully, you can capitalise on market movements using the right option trading strategy while limiting risks and maximising gains. In this blog, you will learn about some of the most successful options strategies and their graphical representations. You will also explore advance option chains and trading tricks using the option chain through stock market app. Keep reading.
What is Options Trading?
Before diving into the specifics of options and share market strategies, it’s essential to understand what options trading entails. Options are derivative contracts that give the holder the right – but not the obligation – to buy or sell underlying assets at a pre-determined price on or before the expiry date.
There are two types of options in the share market:
Call Option: It gives the buyer the right to buy the underlying assets at a pre-determined date before the contract expires. Buying a call option can result in profits if you feel that the underlying asset’s price may increase in the near future.
Put Option: It gives the buyer the right to sell the underlying assets at a pre-determined date before the contract expires. Buying a put option can result in profits if you feel that the underlying asset’s price may fall in the near future.
Options trading involves buying and selling options contracts on the stock exchanges. When a trader buys an options contract, they need to pay a ‘premium’ to the seller.
Different Option Strategies With Examples
Below are the different types of strategy in stock FnO you can explore for maximum profit. You will also find different option strategies graph representations:
Covered Call
The covered call share strategy involves buying and holding the underlying shares while selling call options on that share. It is a low-risk stock trading strategy designed to generate income from premiums while retaining the potential for upside gains in the stock.
When to use the covered call strategy: The covered call strategy is the best to use during a mildly bullish or neutral market.
Graph representation: The covered call strategy can generate limited profits but reduces the downside risk slightly.
Protective Put
The protective put is one of the best trading strategies for bearish or uncertain markets. This strategy is like buying insurance for your stock holdings. It involves purchasing a put option while owning the underlying shares to protect against potential losses if their prices fall.
When to use the protective put strategy: As mentioned, the protective put strategy works best during bearish and uncertain markets.
Graph representation: The protective put strategy has the potential to generate unlimited profits, but losses are capped at the cost of the put option.
Iron Condor
Iron condor is a popular share market strategy used by experienced options traders. It involves simultaneously selling out-of-the-money put and call spreads with the same underlying stocks. It works best in a market with low volatility, as you profit from the premium decay of options.
When to use the iron condor strategy: The iron condor strategy works best during a neutral market with low volatility.
Graph representation: The iron condor strategy has limited profit potential with limited risk on both sides.
Straddle and Strangle
The straddle and strangle are two popular stock option trading strategies for volatile markets. They allow you to capitalise on sharp market movements in either direction. The straddle strategy involves buying both a call and a put option with the same underlying asset and strike price. Whereas, the strangle strategy involves buying a call and a put option with the same underlying asset but different strike prices, usually further from the current price.
When to use the straddle and strangle strategy: You can deploy this options trading strategy when expecting wild market fluctuations. It can be before a major event, such as quarterly earnings reports or general elections. Understanding straddle vs strangle trades can help you decide between the two share strategy.
Graph representation: Both straddle and strangle trading strategies create a “V” shape, with unlimited potential for gain on both sides and limited downside risk.
Advance Option Chain and Elliott Wave Theory
Advanced option chain and Elliott wave theory are two common terminologies for stock options trading. An advance option chain provides a detailed snapshot of the options market for a particular stock or index, showing prices, volumes, and open interest. Understanding the intricacies of an option chain is key to deploying different types of strategy in stock options trading. It helps identify unusual activity or trends, such as shifts in open interest or price patterns, that can signal future price movements.
Elliott Wave Theory is another advanced tool typically used by professional traders to predict market direction. This theory is based on the idea that markets move in predictable waves, and traders can use these patterns to forecast market trends. When paired with an appropriate option trading strategy, Elliott Wave can help you time your entries and exits more effectively.
Selecting The Right Option Trading Strategy
Among all strategy in options trading, choosing the best one can be daunting, especially for beginners. The key is to align your strategy with your market outlook, risk tolerance, and investment objectives.
Assess Your Market Outlook
Your view on the market plays a crucial role in determining the right options trading strategy. Before diving into trades, it’s essential to evaluate how you expect the underlying asset’s price to move. Options allow you to profit from different market conditions, whether it’s bullish, bearish, or neutral.
Know Your Risk Tolerance
Options trading can involve significant risk, particularly with certain strategies with unlimited loss potential. Therefore, you must choose strategies that align with your risk appetite. For instance, you can opt for a single lot option trading strategy to limit your loss.
Understand Your Financial Goals
Your ultimate financial goals should guide your options trading strategies. You need to understand if you’re looking to generate income, hedge existing positions, or speculate on future price movements. If you’re seeking the best option strategy for regular income, you can consider a covered call or iron condor stock strategy.
Consider Time Horizons
The expiration date of an options contract is crucial in choosing an appropriate strategy. Some options traders focus on short-term strategies like Bank Nifty weekly expiry options strategy, while others prefer longer-term positions.
The Bottom Line
By understanding different options trading strategies and selecting the right F&O app, you can generate substantial profits. Strategies like covered calls and protective puts are excellent for generating steady income, while more advanced strategies like straddles, strangles, and iron condors offer profit potential in volatile and range-bound markets.
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