Option Trading Strategies

1. Understanding Options Basics

Before diving into strategies, it’s important to understand the fundamental building blocks of options.

1.1 What Are Options?

Options are financial contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price (strike price) before or on a specific date (expiry).

Call Option: Right to buy the asset.

Put Option: Right to sell the asset.

1.2 Key Terms

Premium: Price paid to buy the option.

Strike Price: Agreed-upon price for exercising the option.

Expiration Date: The last day the option is valid.

In-the-Money (ITM): Option has intrinsic value.

Out-of-the-Money (OTM): Option has no intrinsic value.

At-the-Money (ATM): Strike price is equal to the current market price.

1.3 Why Trade Options?

Leverage: Control large positions with small capital.

Hedging: Protect a portfolio from adverse moves.

Income Generation: Earn through option writing.

Speculation: Bet on market direction or volatility.

2. Broad Categories of Option Strategies

Option strategies are generally grouped based on market outlook:

Bullish Strategies – Profit when prices rise.

Bearish Strategies – Profit when prices fall.

Neutral Strategies – Profit when prices move sideways.

Volatility-Based Strategies – Profit from expected changes in volatility.

3. Bullish Option Strategies

When traders expect the underlying asset to rise, they can use the following strategies:

3.1 Long Call

Setup: Buy a call option.

Outlook: Strongly bullish.

Risk: Limited to the premium paid.

Reward: Unlimited upside.

Example: Stock at ₹100, buy a call at ₹105 for ₹3. If stock rises to ₹120, profit = ₹12.

3.2 Bull Call Spread

Setup: Buy a call at a lower strike, sell another at a higher strike.

Outlook: Moderately bullish.

Risk: Limited to net premium paid.

Reward: Capped at the difference between strikes minus premium.

Example: Buy ₹100 call for ₹5, sell ₹110 call for ₹2 → Net cost ₹3. Max profit = ₹7.

3.3 Bull Put Spread

Setup: Sell a put at a higher strike, buy a put at a lower strike.

Outlook: Bullish to neutral.

Risk: Limited to strike difference minus net premium.

Reward: Premium received.

Example: Stock at ₹100, sell ₹100 put at ₹6, buy ₹90 put at ₹3 → Net credit ₹3.

4. Bearish Option Strategies

For traders expecting price declines:

4.1 Long Put

Setup: Buy a put option.

Outlook: Strongly bearish.

Risk: Limited to premium paid.

Reward: Large downside profit.

Example: Stock ₹100, buy ₹95 put at ₹4. If stock drops to ₹80, profit = ₹11.

4.2 Bear Put Spread

Setup: Buy a higher strike put, sell a lower strike put.

Outlook: Moderately bearish.

Risk: Limited to net premium.

Reward: Strike difference minus premium.

4.3 Bear Call Spread

Setup: Sell a call at lower strike, buy a call at higher strike.

Outlook: Bearish to neutral.

Risk: Limited to difference between strikes minus premium.

Reward: Net premium received.

5. Neutral Strategies

When traders expect little price movement:

5.1 Iron Condor

Setup: Combine bull put spread and bear call spread.

Outlook: Expect low volatility.

Risk: Limited.

Reward: Premium collected.

Example: Sell ₹95 put, buy ₹90 put, sell ₹105 call, buy ₹110 call. Profit if stock stays between ₹95–₹105.

5.2 Iron Butterfly

Setup: Sell ATM call and put, buy OTM call and put.

Outlook: Very low volatility.

Risk/Reward: Limited.

Example: Stock at ₹100, sell ₹100 call and put, buy ₹95 put and ₹105 call.

5.3 Short Straddle

Setup: Sell ATM call and put.

Outlook: Expect no major move.

Risk: Unlimited.

Reward: Premium received.

5.4 Short Strangle

Setup: Sell OTM call and put.

Outlook: Neutral to slightly volatile.

Risk: Unlimited.

Reward: Premium received.

Practical Tips for Traders

Always start with simple strategies like covered calls and protective puts.

Understand the Greeks before attempting advanced strategies.

Trade liquid options (high volume, narrow spreads).

Backtest strategies before live trading.

Avoid overleveraging.

Conclusion

Option trading strategies open up a universe of opportunities far beyond simple stock investing. Whether a trader expects bullish rallies, bearish drops, or calm sideways markets, there is a strategy tailored to that scenario. From basic calls and puts to complex spreads and iron condors, the key is understanding risk, reward, and probability.

Success in options trading is not about predicting the market perfectly, but about managing trades with discipline, applying the right strategy for the market condition, and mastering risk management. For beginners, starting with conservative strategies builds confidence. For advanced traders, options provide powerful ways to optimize portfolios and capitalize on volatility.